Full clarity is needed
Luxembourg is one of the most competitive financial centres when it comes to securitisation. More than 800 vehicles have been created since the Securitisation Law of 2004. PwC Luxembourg invited players from the financial centre to its annual "Securitisation breakfast" to speak about the changes affecting this industry.
Historically, asset securitisation began in the 1970s with the structured financing of mortgages. To sum it up, securitisation is a type of structured financing in which a pool of financial assets is transferred from an originating company to a Special Purpose Vehicle (SPV). This SPV issues debt packages backed by the assets transferred and payments derived from these underlying assets purchased with the incomes of the issuance.
For the originator, this type of financing provides efficient access to capital markets and transfers risks to third parties. The benefits for the investor are portfolio diversification and higher returns; last but not least, the borrower profits from better credit terms.
In spite of all these benefits, the securitisation market still has to heal the wounds inflicted by the financial crisis, as Holger von Keutz, Partner and Securitization Leader at PwC Luxembourg, explains.
“Until 2008, the securitisation market was on the rise; then came the financial crisis and the reputation of those vehicles suffered because some of the structures were misused. The market is picking up again even though in 2012 there was a 35% decrease compared to 2011. On the other hand, confidence is growing because in 2012 more structures were put in place than in 2011 (30 % vs. 22%)”.
With regard to the most common asset classes, there are no major changes compared to last year. Currently the main asset classes are customer loans, mortgages, non-performing loans but also more and more securitisation vehicles involved in real estate and private equity (PE).
In a poll, more than 50% of the respondents who listened to the PwC experts showed confidence about the future of securitisation in Luxembourg. About 29% of the people surveyed think that private equity will be the securitisation structure with the biggest growth potential, followed by residential mortgages (25%). Talking about challenges, there is no doubt that regulatory concerns are the biggest issue for players from this industry.
According to the PwC poll, the AIFMD directive is by far the biggest challenge in the years to come (67%). The key question to which the industry is expecting an answer pretty soon is: will securitisation vehicles be in the scope of the Alternative Investment Fund Managers (AIFM) directive or not?
Investors don’t like uncertainty, and it is still not clear which structures will fall into the scope of AIFM. The deadline for this EU directive to be adopted into national law is July 2013. Any AIF (Alternative Investment Fund) must have an AIFM (Alternative Investment Fund Manager) and a depositary bank.
What is an AIF? AIFs are all undertakings raising capital from a number of investors and investing according to a defined investment policy for the benefits of investors. “The definition is so wide that potentially securitisation vehicles are within the scope of the AIFM directive”, Xavier Balthazar, Regulatory Partner at PwC Luxembourg, remarks.
He continues, “Regulation defines securitisation vehicles as a transaction or scheme whereby assets are transferred to an entity separated from the originator or there is a transfer of credit risk. The EU Commission has identified a risk that this definition could be used to circumvent the application of AIFMD”. That is why the Commission has stated that the reference to a securitisation vehicle should be interpreted narrowly to not circumvent the directive.
Will it be classified as an alternative investment fund or not? Originators, investors and creditors want this issue to be clarified soon. CW