Securitisation 2020

Last Updated January 13, 2020

Luxembourg

Law and Practice

Authors



Loyens & Loeff has an outstanding record of representing issuers, originators and investors (including financial institutions, investment funds and large corporates) and working on both traditional and innovative securitisations involving various asset classes (for example, the first Islamic finance sukuk securitisation of IP rights). The firm's securitisation practice in Luxembourg handles the structuring, regulatory and tax aspects of structured finance and securitisation transactions, including true sale and synthetic securitisation deals, collateralised loan obligations (CLOs), commercial mortgage-backed securities (CMBS), inventory securitisations, securitisation platforms, issuances of asset-backed securities, etc. The team is part of a fully integrated firm with home markets in the Benelux and Switzerland and offices in all major financial centres such as London, New York, Paris, Zurich, Tokyo and Hong Kong.

The Luxembourg law of 22 March 2004 on securitisation, as amended (the Securitisation Law), aims to ensure the bankruptcy remoteness of the securitisation vehicles and their insulation from the financial risk of the originator. In order to benefit from the bankruptcy remoteness regime under the Securitisation Law, it is necessary that: (i) the transaction satisfies the substantive criteria of the securitisation set out in the Securitisation Law; and (ii) the Luxembourg securitisation undertaking (also referred to here as an SPE) submits itself to the provisions of the Securitisation Law in its articles of incorporation, management regulations or issue documents.

Regarding the first condition, the Securitisation Law defines a securitisation as “a transaction by which a securitisation undertaking acquires or assumes, directly or through another undertaking, risks relating to claims, other assets, or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues securities, whose value or yield depends on such risks”. Despite this very broad definition, the Luxembourg Supervisory Commission of the Financial Sector (Commission de Surveillance du Secteur Financier or CSSF) clarifies in its guidelines on securitisation dated 23 October 2013 (Securitisation FAQ) that the main purpose of a securitisation transaction under the Securitisation Law must be an economic "transformation" of certain risks into securities and that the parties should comply with both the legal definition of securitisation and the spirit of the law.

Regarding the qualification of the transfer of the securitised assets as a “true sale” or a secured loan, this is in principle determined in accordance with the law applicable to the transfer instrument. This law would normally be chosen depending on the jurisdiction where the securitised assets and, where applicable, the underlying debtors are located. Most securitisations in Luxembourg involve assets located abroad, and thus the transfer documents are typically not governed by Luxembourg law. For this reason, the qualification of the transfer as a “true sale” or a secured loan is most often a matter of foreign law.

Irrespective of the law applicable to the transfer, the Securitisation Law provides expressly that an SPE’s obligation to reassign the securitised claims back to the transferor included in the securitisation documents may not give basis for the requalification of the assignment and the risk that the assignment would be considered as a secured loan is thus limited. 

While limited recourse and non-petition provisions included in the issuance documents (see 1.2 Special Purpose Entities) generally mitigate the risk of opening of an SPE’s bankruptcy proceedings in Luxembourg and hence of the application of the Luxembourg claw-back provisions, the foreign bankruptcy rules in the jurisdiction of the originator (normally located abroad) should be considered.

In practice, the relevant transfer agreements are usually governed by foreign laws and hence the true sale legal opinions will normally be issued in the jurisdictions the laws of which apply to such agreements.

Securitisation transactions in Luxembourg are usually structured to avoid a potential bankruptcy of the SPE. For this purpose, securitisation undertakings are normally set up under – and need to comply with – the Securitisation Law to be able to benefit from its protection.

As bankruptcy remoteness is mostly a factual matter, the following criteria generally need to be satisfied (and the relevant provisions are included as standard in the issuance and corporate documentation of an SPE) for an SPE to be sufficiently protected against the risk of bankruptcy:

  • restrictions on corporate object and activities in the articles of association of the SPE and in the issuance documents are meant to ensure that the SPE will not engage in any transactions other than the relevant securitisation transaction;
  • debt limitation provisions in the issuance documents are meant to limit the number of creditors that may potentially file for insolvency of the SPE;
  • independent directors and separateness covenants in the securitisation documents are meant to mitigate the risk of potential consolidation of the SPE with any other entity (including the originator);
  • security interests over the securitised assets of the SPE are meant to give the noteholders a priority over such assets vis-à-vis other creditors.

Structurally, securitisation undertakings are normally set up to eliminate any corporate connection with the originator in order to avoid a potential consolidation for the purpose of any bankruptcy, accounting or tax laws. For this reason, shares in an SPE would generally be held by an orphan vehicle – for example, a Dutch foundation (stichting) or an Anglo-American charitable trust.

Contractually, the securitisation documentation and/or the constitutional documents of an SPE would usually include standard non-petition, limited recourse and subordination provisions. Such provisions are expressly recognised by the Securitisation Law. Any proceedings initiated in front of a Luxembourg court in breach of non-petition provisions will be declared inadmissible.

In Luxembourg, it is also possible to set up a compartmentalised SPE, as a result of which the estate of the SPE would effectively be segregated into different compartments, each representing a distinct part of the assets and liabilities of the securitisation undertaking, ring-fenced by law, including in the case of its bankruptcy.

The recourse rights of the creditors are as a rule limited to the assets of the SPE. Where such rights relate to a specific compartment, the recourse of the relevant creditors is then limited to the assets of that compartment.

While bankruptcy remoteness is primarily a factual matter, Luxembourg opinions would normally be issued with regard to the validity of the non-petition, limited recourse and subordination provisions.

The validity, enforceability and perfection of the transfer of financial assets are a matter of the applicable law determined pursuant to the Luxembourg conflict of law rules, which, in turn, depend on the type of the assets being transferred.

In regard to the assignment of, or security over receivables, Article 14 of Regulation (EC) 593/2008 on the law applicable to contractual obligations (the Rome I Regulation) provides that:

  • the relationship between the assignor/security provider and the assignee/security taker is governed by the law applicable to the agreement between such parties;
  • the law governing the underlying claims determines:
    1. the question of whether that claim can be assigned or made subject to a security interest,
    2. the relationship between the assignee/security taker and the debtor,
    3. the conditions under which the granting of assignment of or a security interest over that claim can be enforced against the debtor, and
    4. the question of whether the debtor's obligations under that claim have been paid and discharged in full.

The Securitisation Law also contains certain conflict of law rules applicable in securitisations. In particular, and in line with Article 14 of the Rome I Regulation, the following matters are subject to the law governing the receivable:

  • the transferrable nature of the receivable;
  • the relationship between transferee and debtor;
  • the conditions of effectiveness of the transfer against the debtor; and
  • the satisfactory nature of the payment made by the debtor.

While Article 14 of the Rome I Regulation does not provide for any conflict of law rules in relation to the enforceability of an assignment of receivables vis-à-vis third parties, the Securitisation Law states explicitly that it is the law of the location of the transferor which governs the effectiveness of the assignment towards third parties.

Regarding assets other than receivables, the creation, perfection and enforcement of a security interest over or transfer of assets is governed by the law where such asset is located, notwithstanding the contractual choice of the parties.

In practice, the originators and the securitised assets are prevailingly located abroad and thus the perfection of the transfer of (or the security interest over, as the case may be) such assets would not be governed by Luxembourg law.

Where Luxembourg law applies, perfection requirements depend on the type of the relevant financial asset. Regarding the receivables, the assignment of an existing claim to or by an SPE becomes effective both between the parties and against third parties as from the moment the assignment is agreed on (unless agreed otherwise). While the assignment of a future claim is conditional on it coming into existence, as soon as the claim does come into existence, the assignment becomes effective between the parties and against third parties as from the moment the assignment is agreed on, despite the opening of bankruptcy proceedings or any other collective proceedings against the assignor – even if such proceedings are opened before the date on which the claim comes into existence.

The Securitisation Law does not require notification of the assigned debtor for the purpose of the perfection of the assignment. Nevertheless, the debtor can validly discharge its obligations to the transferor if it has not become aware of the transfer. A transfer of receivables entails a transfer of any related guarantees and/or security interests and its enforceability by operation of law against third parties, without any further formalities.

In case of other assets, it is recommended to assess the relevant perfection requirements on a case-by-case basis, depending on the type of a financial instrument.

In case of a secured loan, a security title transfer with regard to financial instruments or claims located or deemed to be located in Luxembourg is effected under a lender-friendly regime established by the Luxembourg Law of 5 August 2005 on financial collateral arrangements, as amended (Financial Collateral Law). Pursuant to the Financial Collateral Law, a security title transfer of book entry financial instruments is perfected by transferring the securities to an account opened in the name of the transferee or by their designation in an account of the transferor as being owned by the transferee. In regard to claims, the security title transfer is perfected by a mere agreement between the parties. Nonetheless,if the debtor of an assigned claim is not aware of the assignment, it may validly discharge its debt to the transferor.

A Luxembourg SPE governed by the Securitisation Law can also hold the securitised assets as fiduciary for the investors, under the Luxembourg law of 27 July 2003 on trust and fiduciary contracts. A Luxembourg fiduciary arrangement (fiducie) results in a separate fiduciary estate distinct from the personal estate of the fiduciary (or other fiduciary estates held by such fiduciary) and the assets forming part of the fiduciary estate can be seized only by the creditors whose rights relate to such estate, including in case of bankruptcy or liquidation of the fiduciary.

According to the Securitisation Law, agreements entered into in the context of a securitisation transaction and all other instruments relating to the transaction are not subject to registration formalities, provided that they do not have the effect of transferring rights to either (i) immovable property located in Luxembourg, which must be transcribed, recorded or registered or (ii) aircraft, ships or riverboats, recorded on a public register in Luxembourg. If they are nonetheless voluntarily registered, a fixed nominal registration duty applies.

A taxation regime applicable to a securitisation undertaking will depend on its legal form (see 4.11 SPEs or Other Entities).

Securitisation Company

A securitisation company is subject to Luxembourg corporate taxes, levied at a combined general rate of 24.94% for 2020 in Luxembourg City. A securitisation company benefits from a special tax deduction right under which commitments towards investors and creditors are tax deductible. Hence, not only interest accruing on debt instruments but also profits available for distribution to shareholders are tax deductible. As a result, but subject to the comments in the next paragraph, a securitisation company should in principle be income tax-neutral.

The securitisation company’s interest expenses and other commitments may, however, be subject to deduction limitations pursuant to an interest deduction limitation rule (IDLR) effective since 1 January 2019, upon implementation of the European Anti-Tax Avoidance Directive (EU) 2016/1164 of 12 July 2016 (ATAD 1). If a securitisation company realises income other than (i) interest income and (ii) taxable income that is economically equivalent to interest, it would in principle be affected by these rules. The deductions in respect of commitments would then be capped at the higher of 30% of EBITDA or EUR3 million; this may lead to corporate income tax leakage. The IDLR does not apply to securitisation companies that qualify as securitisation special purpose entities within the meaning of the Regulation (EU) 2017/2402 of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation (the Securitisation Regulation) and certain type of standalone entities.

As securitisation companies are liable to Luxembourg taxes, they should normally qualify as tax treaty residents. Ultimately, the relevant source country must confirm whether tax treaty benefits are granted to securitisation companies.

Securitisation Fund

A securitisation undertaking set up in the form of a fund (see 4.11 SPEs or Other Entities) is not subject to Luxembourg corporate taxes, and thus also not subject to the IDLR. A securitisation fund would generally not qualify for tax treaty benefits.

Payments of interest by a securitisation company or a securitisation fund are not subject to Luxembourg withholding tax.

In relation to securitisation undertakings issuing shares, non-resident shareholders (those without a Luxembourg permanent establishment to which the shares of a securitisation company can be allocated) may be taxable in Luxembourg on so-called "speculative gains" (ie, capital gains realised within six months after acquisition in respect of a shareholding of more than 10%), unless an applicable tax treaty provides for an exemption.

Payments of interest or similar income on debt instruments made or deemed to be made by a paying agent (within the meaning of the Luxembourg law of 23 December 2005) established in Luxembourg to an individual resident in Luxembourg will be subject to a withholding tax at a rate of 20%. Such withholding tax will be in full discharge of income tax if the individual beneficial owner acts in the course of the management of his or her private wealth.

Net Wealth Tax

A securitisation company is subject to the minimum annual net wealth tax, which should not exceed EUR4,815, provided that at least 90% of the assets of the securitisation company consist of financial-type assets such as shares, loans, securities and cash. A securitisation fund is not subject to net wealth tax.

VAT

Management services provided to a securitisation undertaking benefit from a VAT exemption and VAT leakage is therefore reduced to a minimum. If they are specific and essential to the management of the securitisation undertaking, collateral management fees and investment advisory fees may be considered to be covered by this exemption. Subscription, underwriting and placement fees may also be VAT-exempt, based on the general exemption of fees on the negotiation of securities.

A securitisation company qualifies per se as a VAT-taxable person in Luxembourg. As a result, the securitisation company must register for VAT if it receives services from non-Luxembourg service suppliers in order for it to self-assess the Luxembourg VAT (in the absence of a general exemption for such services).

FATCA

On 28 March 2014 Luxembourg signed an Intergovernmental Agreement (IGA) for the exchange of tax information with the USA under the US Foreign Account Tax Compliance Act (FATCA). The IGA was implemented in Luxembourg domestic law through a law dated 24 July 2015. Further guidance was published in the form of several circulars. As a result of the implementation of FATCA in Luxembourg, a review is also required for securitisation undertakings, after which registration and reporting requirements may apply.

CRS

The Organisation for Economic Co-operation and Development has developed the Common Reporting Standard (CRS), which aims at implementing automatic exchange of financial account information among participating countries. CRS was implemented into Luxembourg law by the law of 18 December 2015 that governs the classification of Luxembourg entities for CRS purposes.

Qualification as well as reporting considerations may apply, similar to the FATCA laws and regulations.

Luxembourg legal opinions may contain opinions on taxation matters, such as absence of withholding tax and stamp duties. However, comprehensive tax opinions are, as a rule, issued by tax advisers.

Depending on the form, Luxembourg SPEs are subject to either (i) for the corporate entities, the accounting rules under the Law of 19 December 2002 on the trade and companies register and the accounting and the annual accounts of companies (the Accounting Law), or (ii) for the securitisation funds, the accounting provisions applicable to undertakings for collective investment.

The Accounting Law provides a choice between three different accounting frameworks for valuing financial assets:

  • Luxembourg GAAP under the historical model;
  • Luxembourg GAAP under the fair value model; or
  • International Financial Reporting Standards (IFRS).

According to the Securitisation FAQ, multiple compartments SPEs are required to draw up financial statements including a breakdown of the assets and liabilities allocated to each compartment. Financial information relating to each compartment must be clearly identifiable.

Also, to provide investors with an adequate overview, the CSSF recommends to carry out the valuation of the underlying assets at fair value, notably for regulated SPEs having issued securities to the public on a continuous basis, and whose purpose is the traditional or synthetic securitisation of one or several financial assets.

The SPE's accounts must be audited by an approved independent auditor (réviseur d'entreprises agréé).

In practice, the originators are generally located outside of Luxembourg and, for this reason, the balance sheet treatment of the transfer of securitised assets and the questions of consolidation would normally be dealt with by the accountants in the jurisdiction of the originator.

In Luxembourg, legal opinions do not generally cover accounting issues.

Regarding the transactions falling within the scope of the Securitisation Regulation, the latter imposes extensive transparency obligations on the originator, the sponsor and the securitisation special purpose entities (SSPEs, as defined in the Securitisation Regulation).

The Securitisation Regulation defines “securitisation” as a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics:

  • payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures;
  • the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme; and
  • the transaction or scheme does not create exposures which possess all of the characteristics listed in Article 147(8) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012. 

The Securitisation Regulation requires that the holders of a securitisation position, the competent authorities and the potential investors (upon request) are provided with, inter alia:

  • regular information on underlying exposures;
  • prior to pricing, all underlying documentation that is essential for the understanding of the transaction, with an indicative list of the documents included in the Securitisation Regulation – the underlying documentation must include a detailed description of the priority of payments in securitisation;
  • prior to pricing, in the absence of a prospectus, a transaction summary or overview of the main features of the securitisation (including, among others, structure of the deal, the cash flows and the ownership structure, exposure characteristics, the voting rights of the holders of a securitisation position and their relationship to other secured creditors etc);
  • regular investor reports; and
  • any inside information and the significant events.

The originator, the sponsor and SSPE must designate among themselves a reporting entity

CSSF and the Luxembourg Authority for the Insurance Sector (Commissariat aux Assurances or CAA) – the latter only with regard to the entities generally submitted to its supervision – are the competent authorities in Luxembourg to ensure the compliance by the originators, original lenders and SSPEs established in Luxembourg with articles 6 to 9 of the Securitisation Regulation (ie, risk retention, transparency requirements; ban on re-securitisation and criteria for credit-granting), as well as with the STS securitisations framework.

The penalties for non-compliance with the above disclosure requirements are set out in the Luxembourg law of 16 July 2019 implementing, among others, the Securitisation Regulation (the SR Law). Pursuant to the SR Law, the CSSF and the CAA may, within their respective competences, impose administrative sanctions in case of an infringement, ranging from the public statement concerning the identity of the infringing person and the nature of the infringement to a monetary fine.

CSSF and CAA also enjoy certain investigative powers and may refer information to the State Prosecutor for criminal prosecution.

It is not customary in Luxembourg to obtain legal opinions as to compliance with the above disclosure requirements, as it is ultimately a matter of fact.

In Luxembourg, the securitisation undertaking offering its securities – or, where applicable, the entities distributing or placing such securities with investors – must ensure compliance with the restrictions deriving from the Prospectus Regulation (EU) 2017/1129 (the Prospectus Regulation) and the Law of 16 July 2019 on prospectuses for securities, as amended (the Prospectus Law).

Pursuant to the Prospectus Regulation (and subject to the exemptions described below), no offer of debt securities may be made to the public in Luxembourg without the prior publication of a Prospectus Regulation-compliant prospectus duly approved by the CSSF or, as the case may be, approved by the competent authority in another member state and duly passported in Luxembourg. Such prospectus needs to comply with the information requirements set out in the Prospectus Regulation and in the Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 (the Delegated Regulation), including the relevant annexes.

The Prospectus Regulation provides that an offer of debt securities to the public is exempted from the obligation to publish a prospectus, if:

  • the offer is addressed solely to qualified investors, as defined in the Prospectus Regulation;
  • the offer is addressed to fewer than 150 natural or legal persons per member state, other than qualified investors;
  • the offer is addressed to investors who acquire debt securities for a total consideration of at least EUR100,000 per investor, for each separate offer; and
  • the offered securities have a denomination per unit of at least EUR100,000.

The Prospectus Law provides the CSSF with broad powers to apply sanctions in case of an infringement. The CSSF is notably entitled to require additional disclosures in the prospectus, suspend a public offer or an admission to trading to the regulated market, prohibit any advertisements regarding an offer or an admission to trading and prohibit a public offer or trading on the Luxembourg Stock Exchange.

In such context, the CSSF may announce publicly that a certain issuer or offeror has failed to comply with its obligations and may impose administrative fines in connection with violations of the Prospectus Regulation and the Prospectus Law. Any such violation may also be sanctioned by way of criminal penalties.

It is customary to obtain opinions on certain aspects of the disclosure requirements, such as confirmations that a prospectus has been duly approved by the CSSF.

The Securitisation Regulation has replaced and consolidated risk retention requirements formerly spread across various sectoral laws. Generally, the originator, sponsor or original lender in respect of a securitisation must retain on an ongoing basis a material net economic interest in the securitisation of not less than 5%. The Securitisation Regulation also includes an exhaustive list of the acceptable risk retention techniques.

Where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the latter must be retained by the originator. For the purposes of the risk retention provisions set out in the Securitisation Regulation, an entity shall not be considered to be an originator where it has been established or operates for the sole purpose of securitising exposures.

Institutional investors investing in securitisation positions are required in the course of their mandatory due diligence to verify, whether these risk retention formalities have been complied with.

The Securitisation Regulation does not provide for a “substitutive compliance” option for the securitisations non-compliant with the European risk retention requirements.

Please see 4.1 Specific Disclosure Laws or Regulations with regard to competent supervisory authorities and applicable penalties.

While parties may seek legal advice in relation to the risk retention rules, the issuance of the legal opinions is not customary given that the compliance with such rules is a factual matter. Nevertheless, risk retention memorandums are fairly standard.

Statistical Reporting

All Luxembourg securitisation undertakings are subject to reporting obligations pursuant to Circular 2014/236 of the Luxembourg Central Bank (LCB) and Regulation (EU) No 1075/2013 of the European Central Bank (ECB) of 18 October 2013 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions, consisting of an initial registration obligation with the LCB, as well as ongoing reporting obligations (eg, liquidation or major changes in the information provided at the registration). Securitisation undertakings whose balance sheet exceeds certain thresholds will also need to comply with the periodic reporting obligations towards the LCB, including quarterly reports and monthly reports.

Pecuniary sanctions may be imposed on the defaulting SPE.

Authorised Securitisation Undertakings

Luxembourg securitisation undertakings issuing securities to the public on a continuous basis must be authorised and supervised by the CSSF and must, among others, comply with certain reporting requirements.

The concept of public is not defined in the Securitisation Law. In the Securitisation FAQ, CSSF establishes the assessment criteria for the transactions that are not considered to be issues to the public:

  • issues to professional clients, as defined in Annex II of Directive 2004/39/EC on markets in financial instruments (MiFID); given that the Securitisation FAQ pre-dates Directive 2014/65/EU on markets in financial instruments (MiFID II) repealing MiFID, the reference to MiFID should be construed as reference to MiFID II;
  • securities with a nominal value of at least EUR125,000 each are also assumed to have not been issued to the public;
  • private placements of securities do not constitute issuances to the public for the purpose of the Securitisation Law, the private character of the issuance to be established according to the communication means and the securities distribution techniques; the subscription of securities by an institutional investor or a financial intermediary for the purpose of a subsequent placement of such securities with the public would in any case be regarded as an issue to the public.

The Securitisation FAQ also clarifies that merely the fact that securities issued by a securitisation undertaking are listed on a regulated or alternative market does not automatically mean that such securities are issued to the public.

The notion of “public” as used in the Securitisation Law is different from the notion of an offer to the public under the Prospectus Regulation and Prospectus Law (please see 4.2 General Disclosure Laws or Regulations).

In regard to the criterion of continuity, the Securitisation FAQ clarifies that a securitisation undertaking is deemed to issue securities on a continuous basis if it makes more than three issues of securities to the public per year. For multi-compartment securitisation undertakings, this threshold is determined at the level of the SPE on a consolidated basis, and not at the level of each compartment.

Authorised securitisation undertakings are required, among others, to present to the CSSF a copy of the securities issue documents, a copy of the financial and annual reports and the documents issued by an auditor of the annual accounts, as well as any information on the change of a service provider, any change of fees or commissions or the amendment of any substantial provisions of a contract (including the terms of the issued securities).

Additionally, authorised securitisation undertakings must provide the CSSF on a semi-annual basis a report summarising new securities issues, other upcoming issues and the issues matured during the relevant reporting period. The details of the report are further clarified in the Securitisation FAQ.

Finally, a draft balance sheet and profit and loss account of the securitisation undertaking (where applicable, by compartment) is to be provided within 30 days of the financial year close.

The CSSF may impose upon the directors, managers and officers of authorised securitisation undertakings (and the liquidators in case of voluntary liquidation) a monetary fine in the event they refuse to provide the financial reports and the requested information or where such documents prove to be incomplete, inaccurate or false, as well as in case the existence of any other serious irregularity is established.

Rating agencies are regulated by the Regulation (EC) No 1060/2009 of 16 September 2009 on credit rating agencies, as most recently amended by Regulation (EU) No 462/2013 of 21 May 2013 and by the Securitisation Regulation (the CRA Regulation). The CRA Regulation sets out the rules with regard to, inter alia, the registration procedure and the surveillance of the credit agencies in the European Union. It also aims to address, among others, the over-reliance on the credit ratings by financial institutions, which are now required to make their own credit risk assessment and may not mechanistically rely on credit ratings, potential conflicts of interest involving the credit agency or its relating persons, as well various disclosure obligations of the rating agencies.

It is noteworthy that with regard to the securitisation instruments (ie, financial instruments or other assets resulting from a securitisation transaction or scheme, as defined in the Securitisation Regulation), the CRA Regulation establishes a requirement of a double credit rating, to be issued by two credit rating agencies independent of each other. It also provides that the issuer of the securitisation instrument must consider appointing at least one credit rating agency with no more than 10% of the total market share. In order to facilitate the evaluation of the relevant market share of the credit rating agency, the European Securities and Markets Authority (the ESMA) publishes on an annual basis a list of registered credit rating agencies, indicating their total market share.

The CRA Regulation also sets out a number of requirements with regard to ratings on re-securitisations, notably a mandatory rotation of credit rating agencies issuing ratings on re-securitisations with underlying assets from the same issuer every four years.

ESMA is in charge of the supervision of the credit rating agencies and may impose pecuniary penalties on infringing credit rating agencies. The CSSF and the CAA are the competent authorities in Luxembourg for the purposes of implementing the CRA Regulation and verifying compliance with the obligations arising from this regulation by the entities subject to their respective supervision.

The EU capital and liquidity rules transposing the Basel III framework are included in the Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms, as recently amended by Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 (CRR II) and Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV), as recently amended by Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 (CRD V). Luxembourg has implemented CRD IV by the Law of 23 July 2015, the CRD V has not yet been implemented. This regulatory framework contains, among others, a minimum capital requirement for securitisation positions held by Luxembourg credit institutions and investment firms.

Simple, transparent and standardised (STS) securitisation transactions under the Securitisation Regulation may, if certain additional criteria set out in CRR II are satisfied, be subject to lower regulatory capital requirements.

As most securitisation transactions in Luxembourg involve originators and investors located outside Luxembourg, local capital adequacy laws applicable to such originators and investors need to be considered.

Regulation (EU) No 648/2012 on over-the-counter derivatives, central counterparties and trade repositories, also known as the European Market Infrastructure Regulation, as most recently amended by the Regulation (EU) 2019/834 of 20 May 2019 (EMIR) is directly applicable in Luxembourg. EMIR applies also to non-financial counterparties which are very broadly defined. The CSSF has confirmed in its press release 13/26 dated 24 June 2013 that securitisation undertakings are also covered, and may therefore be subject to EMIR obligations (notably clearing and reporting obligations).

Regulation (EU) No 648/2012 has been implemented in Luxembourg by the Law of 15 March 2016 on OTC derivatives, central counterparties and trade repositories, in respect to the sanctioning powers granted to the CSSF to guarantee the correct application of rules and requirements deriving from EMIR.

The matter is not relevant in this jurisdiction.

The Securitisation Regulation and the Securitisation Law ensure a high degree of investor protection.

Aside from the stringent disclosure and reporting requirements (see 4.1 Specific Disclosure Laws or Regulations), the Securitisation Regulation imposes a wide array of other requirements aiming to ensure the adequate investor protection:

  • the risk retention rules (see 4.3 Credit Risk Retention) aim to eliminate a potential conflict of interests by aligning the incentives of the originator with the incentives of an SSPE (and, ultimately the investors);
  • the credit granting requirements imposed on the originators, the sponsors and the original lenders aim to ensure the quality of the securitised assets;
  • the institutional investors are subject to rigorous due diligence requirements. In particular, the investors must, among others:
    1. verify the credit-granting criteria of the originator or original lender and their internal processes and systems, where such originator or lender is not a credit institution or an investment firm established in the European Union,
    2. verify that the originator, sponsor or original lender complies with the risk retention requirements,
    3. verify the compliance of the originator, sponsor or original lender with the transparency requirements,
    4. carry out a due diligence assessment of the risk characteristics of the individual securitisation position and of the underlying exposures, all the structural features of the transaction, etc,
    5. have written procedures in place in order to monitor the compliance with the above obligations and the performance of the investment and underlying exposures and perform regular stress tests, etc.

In Luxembourg, the Securitisation Law ensures the bankruptcy remoteness of a securitisation undertaking (see 1.1 Insolvency Laws) and legal certainty with regard to the standard contractual tools used in the securitisation deals, such a non-petition, limited recourse and subordination provisions (see 1.2 Special Purpose Entities).

Please see 4.4 Periodic Reporting and 4.2 General Disclosure Laws or Regulations in relation to additional reporting and disclosure rules in Luxembourg.

The Securitisation Regulation aims to protect the retail investors by including certain restrictions with regard to the sale of the securitised positions to retail clients, including a requirement to perform a suitability test in accordance with Article 25(2) of MiFID II.

Additionally, in the case of offerings made to retail investors, a key information document may need to be prepared, in accordance with Regulation (EU) No 1286/2014 on key information documents for packaged retail and insurance-based investment products.

Finally, MiFID II contains a number of requirements aiming to protect investors, including product governance, information and record-keeping.

The Luxembourg law of 5 April 1993 on the financial sector, as amended (the 1993 Law), institutes a special regime for Luxembourg mortgage banks (banques d’emission de lettres de gage). These are specialised credit institutions whose main object is granting, among others, loans secured by movable or immovable property and issuing on that basis mortgage bonds (lettres de gage) secured by such rights. Luxembourg mortgage banks are supervised by CSSF and are subject to certain activity restrictions and other requirements under the 1993 Law, including a mandatory over-collateralisation ratio.

Corporate Form

In Luxembourg, a securitisation undertaking governed by the Securitisation Law can be set up either as a company or as a fund. 

A securitisation company is subject to the general corporate framework under the Luxembourg law of 10 August 1915 (the Companies Law) and can take the form of:

  • a public limited company (société anonyme or SA);
  • a private limited company (société à responsabilité limitée or SARL;
  • a partnership limited by shares (société en commandite par actions or SCA); and
  • a co-operative organised as a public limited company (société cooperative organisée sous forme de société anonyme or SCSA).

In practice, public and private limited companies are most commonly used.

A securitisation undertaking can also be set up as a fund (fond de titrisation), managed by a Luxembourg-based management company (société de gestion) in accordance with its management regulations. A securitisation fund does not have legal personality and can be structured either as (i) co-ownership of assets or (ii) as a fiduciary arrangement where the assets are held by the fiduciary for the account of the investors. Previously, securitisation funds represented only a marginal part of the securitisation undertakings in Luxembourg, but their popularity is currently on the rise.

One of the main differences between a securitisation undertaking set up as a corporate entity or a fund is their tax treatment (see 2.2 Taxes on SPEs).

Please also see 1.1 Insolvency Laws for other formal and substantive conditions of securitisation and 1.2 Special Purpose Entities for the compartmentalisation option of Luxembourg securitisation undertakings.

AIFMD

Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers (the AIFMD) and the Luxembourg law of 12 July 2013 on alternative investment fund managers transposing the AIFMD (the AIFM Law) address the question on whether a securitisation undertaking can be considered as an alternative investment fund (AIF).

Pursuant to the AIFMD and the AIFM Law, a securitisation special purpose entity, as defined thereunder (the SSPE), does not constitute an AIF. SSPEs are defined in the AIFMD as entities whose sole purpose is to carry on a securitisation or securitisations within the meaning of Regulation ECB/2008/30 of the European Central Bank of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions and other activities that are appropriate to accomplish that purpose. Regulation ECB/2008/30 has been repealed by Regulation ECB/2013/40.

According to the Securitisation FAQ (with reference to the guidance note on the definitions of “financial vehicle corporation” and “securitisation” under Regulation ECB/2008/30 issued by the ECB) securitisation undertakings issuing collateralised loan obligations are considered as being engaged in securitisation transactions and, as a result, are not subject to the AIFM Law. In contrast, entities that primarily act as “first” lenders (ie, originating new loans) are not considered as being engaged in securitisation transactions and will thus fall within the scope of the AIFM Law. The same applies to securitisation undertakings issuing structured products that primarily offer a synthetic exposure to assets other than loans (non-credit-related assets) and where the credit risk transfer is only ancillary.

Independently from their potential qualification as SSPEs (for the purpose of the AIFMD), securitisation undertakings that only issue debt instruments should not, according to the Securitisation FAQ, constitute AIFs for the purpose of the AIFM Law. Similarly, irrespective of whether securitisation undertakings qualify as SSPEs for the purpose of the AIFMD, it is the view of the CSSF that securitisation undertakings that are not managed in accordance within a “defined investment policy” (within the meaning of the AIFM Law) do not constitute AIFs.

A securitisation undertaking issuing securities to the public on a continuous basis within the meaning of the Securitisation Law (see 4.4 Periodic Reporting) will be subject to the authorisation and prudential supervision by the CSSF. Please see 4.11 SPEs or Other Entities with regard to the application of the AIFM and the AIFM Law to the securitisation undertakings.

Additionally, a Luxembourg SPE will need to comply with the passive management requirement, as clarified in the Securitisation FAQ. Namely, the role of the SPE should be limited to the “prudent man” passive management of the securitised portfolio, and the SPE must avoid all activities likely to qualify it as entrepreneur. The passive management requirement is applicable irrespective of whether or not the management of the securitised portfolio has been delegated to a third party.

Loan origination by a Luxembourg SPE is also restricted. Structures originating loans instead of acquiring them on the secondary market may fall under the definition of securitisation, only provided that the securitisation undertaking does not finance its loan origination activity from the funds raised from the public and that the issuance documentation either clearly defines the assets servicing the repayment of the loans originated by the SPE or clearly describes the borrowers and/or the borrower selection criteria, as well as information on characteristics of the loans granted.

On the liability side, a Luxembourg SPE is generally expected to finance its activities by issuing securities. Nevertheless, according to the Luxembourg FAQ, Luxembourg SPEs may also borrow, if this is necessary for liquidity purposes, notably in case of lack of synchronisation between the cash flows relating to the securitised assets and the financial flows relating to the securities issued by the SPE or in order to pre-finance the acquisition of the securitised assets (ie, "warehousing"). Borrowing and leverage can also be used to improve the investors' return. In this scenario, borrowing is only acceptable if it remains accessory to the main transaction and if the financing of the securitisation transaction also includes the issuance of securities for a proportionally substantial amount. In each case, the issuance documentation must properly disclose any additional risks for investors resulting from such leverage.

Third-party guarantees, letters of credit, reserve funds and over-collateralisation are standard credit enhancement tools. Often, the securities issued by the securitisation undertaking are split into several tranches carrying different risk and return profiles. The tranching of credit risk is one of the main conditions for the transaction to qualify as a securitisation under, and for the application of provisions of, the Securitisation Regulation.

Luxembourg is not known to participate in the securitisation market through any government-sponsored entities.

The vast majority of securitisation undertakings in Luxembourg are not regulated and, as a result, they usually target investors that are “professional clients” for the purposes of MIFiD II, including credit institutions and investment funds.

In most cases, the investors in Luxembourg securitisation transactions are located abroad. Luxembourg does not impose any additional obligations in terms of such investors, but they must comply with their local rules and regulations (eg, diversification and capital adequacy rules).

Please see 4.9 Investor Protection concerning the restrictions on the sale of securitisation positions to retail clients under the Securitisation Regulation.

In practice, transfer documents are rarely governed by Luxembourg law and, hence, their content would be determined by the chosen law and the market practice of the relevant jurisdiction.

Where Luxembourg assets are involved, Luxembourg law requirements with regard to the transfer of the title and the perfection of such transfer (depending on the type of the assets) would be normally included, as well as the customary representations and covenants with regard to the status of the securitised assets, the underlying debtors, etc.

In practice, securitisation documents are rarely governed by Luxembourg law and the scope of the principal warranties would thus be determined by the applicable foreign law and market practice. Standard warranties generally cover the status of the parties, the validity and enforceability of the documents, as well as warranties with regard to the securitised assets.

From the Luxembourg perspective, the following matters are usually subject to specific warranties:

  • the securitisation undertaking being an unregulated securitisation undertaking within the meaning of the Securitisation Law (ie, not issuing securities to the public on a continuous basis);
  • passive management of assets;
  • separate treatment of assets allocated to different compartments (in case of a multi-compartment securitisation undertaking);
  • the securitisation undertaking not being subject to the AIFMD and the AIFM Law;
  • the central administration and the "centre of main interests" of an SPE, as the latter term is used in Article 3(1) of Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), being in Luxembourg.

Additional representations may be required in a securitisation transaction subject to the Securitisation Regulation.

Luxembourg law will be applicable with regard to the perfection of the transfer of or a security interest over the Luxembourg assets (see 1.3 Transfer of Financial Assets).

In practice, securitisation documents are rarely governed by Luxembourg law and the scope of the principal covenants would thus be determined by the applicable foreign law and market practice. From the Luxembourg perspective, the matters referred to in 5.2 Principal Warranties would normally also be subject to the relevant covenants.

In practice, servicing documents are rarely governed by Luxembourg law and the scope of relevant servicing provisions would thus be determined by the applicable foreign law. Usually, the standard provisions relating to the collection, enforcement and administration of the securitised assets, information obligations, as well as servicing fees, are expected.

It is notable that the Securitisation Law expressly provides that, in case of any insolvency proceedings opened with regard to the servicer, the SPE may claim any sums collected by the servicer on its behalf prior to the opening of the bankruptcy proceedings without other creditors having any rights to such amounts. It is currently unclear how this provision would be treated in insolvency proceedings opened outside Luxembourg.

In practice, securitisation documents are rarely governed by Luxembourg law and the scope of relevant default provisions would thus be determined by the applicable foreign law and market practice. Non-payment, insolvency, a misrepresentation and a breach of other undertakings are the standard principal defaults.

In practice, securitisation documents are rarely governed by Luxembourg law and the scope of relevant indemnities provisions would thus be determined by the applicable foreign law and market practice.

A Luxembourg SPE may not create security interest or transfer its assets for guarantee purposes, except to secure the obligations it has assumed for the securitisation of such assets or in favour of its investors. Any arrangements in violation of this restriction are void by operation of law. Additionally, an SPE cannot assign its assets except in accordance with the modalities set out in its articles of association or its management regulations.

In practice the securitisation documents are in most cases governed by foreign laws (most commonly by English or New York law) and submitted to the jurisdiction of foreign courts.

Where the securitisation documents are subject to the jurisdiction of English courts (or courts of other member states), and unless enforcement is sought pursuant to Regulation (EC) No 805/2004 of 21 April 2004 creating a European enforcement order for uncontested claims, a final and conclusive civil or commercial judgment rendered by an English or other EU competent court will generally be recognised and enforced in Luxembourg in accordance with the conditions set out in Regulation (EC) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Regulation 1215/2012).

Where the securitisation documents are subject to the jurisdiction of New York courts (or other jurisdiction falling outside the Regulation 1215/2012 and not subject to a separate treaty or convention with Luxembourg), courts in Luxembourg will not automatically recognise and enforce a final judgment rendered by such court. Instead, such judgment will be subject to the enforcement procedure (exéquatur) set forth in the Luxembourg New Code of Civil Procedure and relevant case law, requiring that the competent court has applied to the dispute the substantive law as designated by the Luxembourg conflict of laws rules, that the judgment was obtained in compliance with the rights of the defendant and that the judgment is enforceable in the relevant jurisdiction.

The Securitisation Law provides for an extremely flexible and business-orientated securitisation framework with a high degree of legal certainty. However, the case law in Luxembourg in relation to the securitisation transactions is scarce, not only due to limited litigation but also to the out-of-court enforcement options under the Luxembourg law collateral arrangements).

The issuer is a bankruptcy-remote SPE under the Securitisation Law acquiring the securitised risk and transferring it to the investors, mainly through issuance of securities. Most SPEs in Luxembourg are unregulated.

The sponsor is the originator or other entity initiating and co-ordinating the securitisation process. The Securitisation Regulation requires a sponsor to be a credit institution or an investment fund.

The underwriter (often an investment bank) serves as an intermediary between the issuer and the investors in an offering. The underwriter analyses investor demand, provides guidance on structuring the transaction and underwrites the notes.

The servicer is in charge of collecting and enforcing the securitised receivables. This role is often performed by the originator, but other specialised service providers may also be appointed.

According to the Securitisation Law, the securitisation undertaking may entrust the assignor or a third party with the collection of claims it holds as well as with any other tasks relating to the management thereof, without such persons having to apply for an authorisation under the legislation on the financial sector.

Investors acquire the securities issued by the SPE. The largest investors are usually foreign pension funds, insurance companies, investment fund managers and commercial banks.

The trustees usually act on behalf of the investors under the securitisation documentation and/or hold the security interests in favour of the noteholders. The form of the trustee appointment (trust or agency) and the scope of its rights and obligations are determined in the securitisation documentation, commonly subject to foreign law. 

If subject to Luxembourg law, the Securitisation Law also allows to appoint a fiduciary-representative having their registered office in Luxembourg and entrusted with the management of the SPE’s investors’ interests. The fiduciary representative may also be granted a power to act in the investors’ interest in a fiduciary capacity, in which case the assets it acquires for the benefit of investors form a fiduciary estate separate from its own assets and liabilities.

Synthetic securitisation (where only the risk but not the title to the assets is transferred) is permitted under the Securitisation Law. The Securitisation Regulation generally recognises synthetic securitisation, except in case of STS securitisations, where a true sale is generally required.

The objectives behind synthetic securitisation depend on the type of the transaction. While the rationale of the balance sheet synthetic securitisations is to provide a credit risk management tool and improved regulatory treatment to the originators, the primary purpose of the arbitrage synthetic securitisation is the profit from the higher spread received on the underlying assets and the lower spread paid to the noteholders.

As there is no title transfer in synthetic securitisations, they are generally easier and less costly to structure and allow overcoming of transfer restrictions in the underlying documentation.

Synthetic securitisation is subject to the same requirements under the Securitisation Law as the traditional securitisation. Any securitisation undertaking engaged in synthetic securitisation and issuing securities to the public on a continuous basis would thus be subject to authorisation and prudential supervision by the CSSF.

Synthetic securitisation is governed by the same legal framework as traditional securitisation – that is, mainly the Securitisation Law and the Securitisation Regulation.

Synthetic securitisations involving the use of derivatives may be subject to EMIR (see 4.7 Use of Derivatives).

The Securitisation Law provides expressly that securitisation transactions falling within its scope do not constitute activities subject to the Luxembourg law of 6 December 1991 on the insurance sector. For this reason, there is no risk in Luxembourg that certain synthetic securitisation structures would trigger the licensing requirements under the insurance legislation.

Due to the business-orientated securitisation regime established by the Securitisation Law (which requires the presence of a securitisation undertaking), synthetic securitisation structures in Luxembourg are usually set up with the involvement of an SPE, which would enter into a derivative contract or a guarantee with the originator. Similarly to the traditional securitisation, the securitisation undertaking would then issue securities to the investors and use the proceeds of the issuance to fund its obligations under such derivative contract or a guarantee.

CRR II includes specific provisions with regard to the treatment of synthetic securitisations and its effect on the capital adequacy and risk management of the investors subject to its provisions. While synthetic securitisation may not qualify as STS securitisation under the Securitisation Regulation and thus does not benefit from advantageous regulatory treatment under CRR II, the Securitisation Regulation has mandated the European Banking Authority (the EBA) to develop a report on the feasibility of a framework for the STS synthetic securitisation (limited to balance sheet securitisation). For this purpose, a discussion paper has been published by the EBA on 24 September 2019 and the market participants were invited to submit their comments by 25 November 2019. The discussion paper will serve as a foundation for the EBA final report, based on which the Commission will submit a report to the European Parliament and the Council, together with a legislative proposal, if appropriate. 

The Securitisation Law does not per se limit the types of assets to be securitised and Luxembourg SPEs have been used to cover a wide array of assets (notably commercial loans, mortgage loans, auto loans and leases, trade receivables and non-performing loans). Nevertheless, the passive management requirement (please see 4.12 Activities Avoided by SPEs or Other Securitisation Entities) may have some practical implications on the type of the securitised assets, and the securitisation of physical assets (eg, commodities) would require careful structuring.

The Securitisation Regulation is more restrictive with regard to the type securitised assets and limits the securitisation transactions falling within its scope to credit risk only, expressly excluding exposures which possess all of the characteristics listed in Article 147(8) of CRR – ie, exposures in physical assets where the debtor is created specifically to finance or operate physical assets or comparable exposures, contractual arrangements give the investors a substantial degree of control over the assets and the related income and such income is the primary source of repayment of the debt.

Luxembourg SPEs are generally adapted to securitisation of any type of financial assets.

Loyens & Loeff Luxembourg S.à r.l

18-20 rue Edward Steichen
L-2540 Luxembourg

+352 466 230

+352 466 234

info@loyensloeff.lu www.loyensloeff.lu
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Loyens & Loeff has an outstanding record of representing issuers, originators and investors (including financial institutions, investment funds and large corporates) and working on both traditional and innovative securitisations involving various asset classes (for example, the first Islamic finance sukuk securitisation of IP rights). The firm's securitisation practice in Luxembourg handles the structuring, regulatory and tax aspects of structured finance and securitisation transactions, including true sale and synthetic securitisation deals, collateralised loan obligations (CLOs), commercial mortgage-backed securities (CMBS), inventory securitisations, securitisation platforms, issuances of asset-backed securities, etc. The team is part of a fully integrated firm with home markets in the Benelux and Switzerland and offices in all major financial centres such as London, New York, Paris, Zurich, Tokyo and Hong Kong.

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