The long-awaited draft bill amending Luxembourg’s 2004 securitisation law (the “Bill”) was submitted to the Luxembourg Parliament on 21 May 2021. The Bill aims to increase the flexibility of the already successful Luxembourg securitisation regime. In view of growing competition from other European jurisdictions, the amendments are expected to reinforce Luxembourg as the central market for securitisation transactions and positively impact CrossLend’s customers.

CrossLend’s securitisation-as-a-service (SaaS) product allows investors and originators to use CrossLend’s legal setup, including two Luxembourg securitisation vehicles (“SVs”), for their transactions. In this context, some key changes set out in the Bill are relevant for CrossLend’s investors and originators. We have outlined these key changes and summarised how our customers will specifically benefit from the securitisation amendments. Summaries of the other amendments of the Bill are also available to read online.

Broader financing means

As of today, SVs must finance their acquisition of underlying assets or risks by issuing “securities”; however, the law had not previously provided a definition of the term “securities”. The Bill no longer uses the term “securities” and instead uses the broader term “financial instruments”. This means that when the amendments come into effect, SVs will be authorised to issue financial instruments rather than securities in the strict sense, including, for instance, promissory notes or Schuldscheine governed under German law.

Lifting loan financing restrictions

Loan financing by SVs is currently limited in scope, restricted to warehousing, short term liquidity facilities, and the permanent financing of less than 50% of the volume of securities issued. However, once the amendments become effective, these limitations will be lifted, and SVs will be able to fully finance the acquisition of underlying assets via loans, with the value or return thereunder depending on the risks securitised.

Enlarging the scope of security interests

Pursuant to the Bill, SVs will be able to grant security interests over their assets to any party involved in the securitisation transaction (this will no longer be limited to investors in securities issued by the SV). For instance, an SV could grant a pledge to a bank which itself finances an investor in the SV.

From passive to active management of CDOs and CLOs

The Luxembourg regulator currently requires that investments by SVs be passively managed. The Bill intends to change this and allows for active management by the SV or a third party of a portfolio of risks relating to debt securities (CDOs) or loans (CLOs), but not to equity assets, as long as the SV does not issue financial instruments to the public (but via private placement).

The bright future of Luxembourg’s securitisation vehicles

According to PwC’s comprehensive guide on securitisation published in June 2021 [1], the number of creations of new SVs in Luxembourg went up again in 2020 with around 160 new SVs (against 145 in 2019). This, alongside the modernisation described above, indicates that Luxembourg remains a leading European center for securitisation transactions.

[1] Available at: https://www.pwc.lu/en/securitisation/securitisation-in-luxembourg-comprehensive-guide-2021.html