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By Aurélien Hollard, Partner, CMS, José Juan Ocaña, Senior Associate at CMS, Julien Robert, Knowledge Lawyer at CMS, Adrien Rollé, CEO of OPPORTUNITY, Hugo Vautier, Head of Fund Services at OPPORTUNITY, Laurent Weis, CFO at OPPORTUNITY and Rachel Germain, CLO, OPPORTUNITY as featured in Insight Out Magazine #25
Whereas securitisation is governed by the EU Regulation 2017/2402 on securitisations in the EU (the Securitisation Regulation), Luxembourg securitisation undertakings are further governed by the law of 22 March 2004 on securitisation, as amended (the Securitisation Law). The Securitisation Law provides a broader definition of the securitisation concept than the Securitisation Regulation, making it a very attractive solution to investors, originators and sponsors in the EU.
The popularity of securitisation in Luxembourg has been increasing for the last decade, and it is considered a very efficient financing method used sometimes as alternatives to investment funds, under certain conditions. The principle of securitisation is the transfer of risk. It specifically consists in a transaction by which a securitisation undertaking acquires or assumes, directly or indirectly, risks relating to claims, other assets, or obligations assumed by third parties and issues financial instruments or any form of loan whose value or yield depends on such risks.
Due to its proven value and efficiency in the capital markets sector, the Securitisation Law was amended on 25 February 2022 with the purpose of making this tool more flexible to sponsors and originators while keeping a high level of protection to investors. As a result of the amended Securitisation Law, market players may benefit from the following innovations:
- the possibility to incorporate a securitisation vehicle (SV) as as “société en nom collectif”, “société en commandite simple”, “société en commandite spéciale” and “société par actions simplifiée”, which represents an important structuring change in the context of SV partnerships;
- new methods to finance SVs’ acquisitions with financial instruments other than securities (such as warrants, loans, promissory notes etc.);
- rules relating to compartments allowing the SVs’ bylaws to organise (i) shareholder votes on the approval of annual accounts, (ii) distributions of profits and reserves, and (ii) allocations to the legal reserve per compartment, rather than at the level of the SV;
- the possibility for SVs (or a third party) to actively manage debt portfolios insofar as the financial instruments issued by the SVs in connection with such portfolio are not offered to the public;
- the incorporation of clear definitions of issuance of securities “to the public” and “on a continuous basis”[1]; and
- the possibility for SVs to grant any kind of security interests to third parties other than investors or creditors if this is done in the context of a securitisation transaction.
The amended Securitisation Law has been welcomed by the Luxembourg financial market which is already experiencing the positive impact created by it. As a result of this new legal regime, Luxembourg intends to increase its attractivity as a jurisdiction of choice in the EU for certain financial instruments such as collateralized loan obligations (CLOs).
Tapping into opportunities
The attractiveness of the securitization regime in Luxembourg has been noticed by numerous private investors, among others HNWI, family offices, and financial institutions on behalf of their clients or alternative investment funds. There is also a trend towards the fact that investors prefer a subscription through a clearing system, which is potentially increasing the liquidity and the visibility of the securities. In terms of underlying investments, the asset range is unlimited as long as a risk is embedded into the assets. A few examples: bridge financing backed by different kind of assets, real assets (real estates, jets, yachts, classic cars, art, etc), private equity, litigation financing or impact financing.
The amendment of the securitization law has clearly facilitated the daily business of SVs. Regarding the new possibility for SVs to grant any kind of security interests to third parties other than investors or creditors, a concrete example may be found in the case where a subsidiary of the SV apply for a bank financing in order to buy a real estate. It is usual in this kind of transaction that the bank requests, in guarantee of the financing, a pledge over the shares of the borrower. Before the amendment of the law, it would have been necessary to insert a holding company between the SV and the borrower to grant the pledge to the bank. With the amendment of the law, the SV may now grant it directly.
The possibility for SVs to actively manage debt portfolios is also interesting, even indirectly. For example, before the amendment of the law, the proceeds of a sale / divestment of assets owned by a compartment could not be kept at the level of the compartment and re-invested directly. It had first to be paid back to the investors, through a reimbursement of notes and accrued interests and then reinvested through a new issuance of notes (involving the burden of the legal documentation and the risk that the investor decides not to re-invest). Thanks to the active management, it is now possible to draft the terms and conditions in a way that will allow the SV to directly re-invest into another asset.
SVs are not spared by the recent retailisation wave within the alternative assets range. The private investors have been showing deep interest in private assets for many years but they were unable to reach these markets until recently. For a couple of years now, numerous projects and initiative are launched, on a smaller scale than in the past, allowing “retail” investors to find exposure to assets that used to be out of their reach; premium real estate, art works, collectible cars, jewelry and watches, wines, etc. In the vast majority of cases, structuration of such endeavor is made through securitization, topped up with tokenization.
Tokenisation & retailisation
Securitisation vehicles are relevant in the context of assets’ tokenisation due to, inter alia, their flexible legal and regulatory regime which allows, under certain conditions regulating notably the vehicle as well as the offering, to raise retail money while remaining a reasonably affordable investment structure. Tokenisation is increasingly viewed as a gateway for retail investors to illiquid assets, such as real estate, artworks, or intellectual property rights, providing retail investors with the unique opportunity to invest into new asset classes that were previously unavailable to them, and diversify their investment portfolios.
Thanks to automation and digitalisation allowed by the blockchain, tokenisation leads to, inter alia, reduced transaction times (e.g., investors’ onboarding and subscription process), enhanced risk management, lower costs for investors, improved and more technological management (e.g., registry management and maintenance). It also contributes to the effectiveness of the secondary market, notably using virtual billboards, by speeding up transactions and removing all unnecessary intermediaries.
Under the combined trends of retailisation and tokenisation, securitisation vehicles are likely to remain a solution of choice in the Luxembourg investment toolbox.
On 23 March 2023, most of the provisions of Regulation (EU) 2022/858 of the EP and of the Council on a pilot regime for market infrastructures based on distributed ledger technology (the DLT Pilot Regime) will enter into force, aiming to provide so-called DLT market infrastructures which operate securities trading and settlement systems based on DLT with a set of rules suited to crypto assets that qualify as financial instruments within the meaning of Directive 2014/65/EU, further enhancing the efficiency of DLT market infrastructures.
[1] “offer to the public” shall be understood as an offer that is not addressed to professional clients, the minimum investment amount is lower than EUR 100,000 and where the financial instruments are not distributed via private placement.
“on a continuous basis” shall be met when an SV makes more than 3 offers to the public within a financial year taking into account the offers made by all the compartments.
