Securitization vehicles in Luxembourg
by Christophe Diricks and Alexandre Prost-Gargoz, Members of LPEA*
On 17 November 2015 Deloitte Luxembourg hosted its first edition of the Private Debt Conference aiming at giving the more than 120 participants a thorough picture of the assets class’ development and how drivers behind private debt differ from those of Private Equity and Real Estate.
“Primarily driven by new regulations such as BASEL III and the ECB’s Asset Quality Review, the lending market in Europe is undergoing a shift from bank towards non-bank funding”, elaborates Alexandre Prost-Gargoz, Tax Partner at Deloitte Luxembourg.
One of these trends will include the utilization of Luxembourg securitization vehicles (SVs) to allow for a new form of financing and refinancing for industries that have traditionally heavily relied on bank financing (e.g. shipping, infrastructure and real estate, SME). Together with loan originating debt funds, a new European financial market landscape is emerging with the European Commission, the European Central Bank and the Bank of England taking a positive view on securitization. It is anticipated that Simple, Transparent and Standardized (STS) securitization will receive favourable treatment under the European Capital Requirements Directive IV (CRD IV) and Solvency II.
Why Luxembourg is leading the way
The two key principal advantages of the Luxembourg securitization vehicle – as compared to other vehicles – are its flexibility, especially in terms of form of vehicle and asset classes and its tax neutrality. “To the extent there is a commitment towards creditors/investors, the securitization company will suffer minimal direct taxes costs. It will also be exempt from VAT on management fees irrespective of whether it is regulated or not”, explains Christophe Diricks, Tax Partner at Deloitte Luxembourg.
The multi-compartment structure of Luxembourg securitization companies can be a very attractive and efficient restructuring tool as it allows individual borrowers to refinance existing commitments through dedicated and segregated compartments, whilst sharing the operational costs of a securitization company among multiple borrowers. In addition, Luxembourg securitization is interesting for banks that need to restructure or shrink their balance sheets as loans can be sold to the securitisation vehicle and banks can continue long-standing client relationships by becoming the loan servicer of the securitization vehicle.
*Alexandre Prost-Gargoz and Christophe Diricks are partners of Deloitte Luxembourg.