Luxembourg: A Flexible EU Securitisation Regime

Importantly, the Luxembourg Securitisation Law allows compartments, or ring-fenced subdivisions to be established within transactions, which makes it straightforward and cost-effective to use one legal entity for multiple securitisation transactions. According to PwC’s 2023 survey, more than 90% of the securitisation vehicles observed have multiple compartments and it is estimated some 6000 to 8000 transactions are currently active in the market. On a pan-EU basis, ECB data showed Luxembourg accounted for over 28% of all Euro area Financial Vehicle Corporations (“FVC”) in 2022, ranking only behind Ireland. In terms of the amount of securitised assets, Luxembourg volumes were behind just Ireland and Italy.

While renowned for its flexibility, Luxembourg’s legal and regulatory securitisation framework is also demonstrably robust and has been tested through a number of market cycles. Issuers appreciate the ability to be in compliance with EU securitisation requirements where desired, in addition to the cost-effective use of compartments for transactions. Luxembourg is also the largest fund centre in Europe, which has helped foster a dynamic financial services industry. Leading service providers are therefore well established in the jurisdiction, with a particular depth of specialist expertise among professionals in the securitisation sector.

The ability to create several compartments or cells within an entity is clearly efficient for sponsors of securitisation transactions from a cost savings perspective. Significantly, the segregation has full legal recognition in Luxembourg, with limited recourse and non-petition mechanism provided for in the law that essentially bullet-proofs securitisation structures and provides great comfort to investors. While these structural features do exist in other jurisdictions, such provisions are typically contractual arrangements and not enshrined into law as is the case in Luxembourg. A variety of legal forms exist for securitisation vehicles to be structured optimally depending on the set of circumstances, including corporations and partnerships, or “securitisation funds” which will often utilise Luxembourg’s Fiducie vehicle which acts in similar fashion to a trust under civil law. Further, Luxembourg also benefits from a vast network of tax treaties which greatly increases flexibility and structuring options.

Regulatory Reform

Amendments to Luxembourg’s Securitisation Law which came into effect in 2022, intending to increase the attractiveness of the regime to issuers, changed the manner in which the Securitisation Vehicle (“SV”) can be funded, so efficient structures can self-finance. Previously limited in proportion and duration, the SV could only be financed primarily by the issuance of securities, limiting the possibility to resort to other sources such as a credit facility. As the legislative changes removed restrictions on leverage and the nature of the securities permitted as collateral, the SV can enter into a facility with a credit institution, as required to acquire the full amount of the contemplated investments, which has provided greater certainty to the market. As CSSF authorisation for compartments is not required, this technology has also been popular in the fund space with the SV utilising compartments issuing equity as an Alternative Investment Fund (“AIF”).

Luxembourg’s regulatory reform for securitisation followed the EU’s introduction in 2019 of the Simple Transparent and Standardised (“STS”) framework for securitisations, which aimed to enhance the attractiveness of the asset class for investors in the region. While recognised as an important funding diversification tool for banks, European securitisation markets have not had the same levels of liquidity that the US market has seen since the financial crisis, however the STS initiative has had limited success in Europe. The banking sector continues to explore avenues to revitalise securitisation markets in Europe and calls for further reform in Germany could further promote securitisation and deepen capital markets in the region. It is also well understood that capital markets financing is critical to avoiding a recession and high inflation in the continent. Luxembourg’s proximity, as well as a shared language, has made it a natural home for securitisation deals originating from neighbouring Germany, representing an important source of financing for Europe’s manufacturing powerhouse in addition to banks and leasing companies.  State Secretary Jörg Kukies and senior German banking executives have pointed towards simplifying rules regarding reporting obligations and due diligence requirements by EU nation states and a review of capital requirements as next steps towards a Capital Markets Union to prevent Europe losing touch with the US where securitisations are more prevalent.

The Maples Group: Securitisation in Luxembourg

From our offices in Luxembourg, the Maples Group provides clients with a comprehensive range of legal, fund, fiduciary, regulatory and compliance and entity formation and management services. Our teams provide services for all types of securitisation transactions, from traditional to bespoke structures, with an approach that benefits issuers, arrangers, credit providers and lead transaction counsel who are seeking integrated structured finance solutions.

In addition to Luxembourg, our global Structured Finance team provides expert counsel on the laws of the BVI, the Cayman Islands, Ireland and Jersey. We offer our full suite of securitisation related services from a global network of 16 offices, encompassing everything from commoditised deals to international securitisation transactions including CLOs, repackaging programmes and structured products using collateralised swaps and repos.