Getting its share of the market for securitisation products
Luxembourg has clearly developed as a dominant platform for international securitisation transactions, says Allen & Overy Luxembourg. A new position by the national regulator CSSF now opens a whole new market for issuers. According to the international law firm, the concept of securitisation has suffered from bad press. Paul Péporté, Senior Associate of Allen & Overy Luxembourg explains why one should not limit this concept to the repackaging of US mortgage loans.
With the implementation of Luxembourg’s Securitisation Act of 2004, Luxembourg has become an attractive jurisdiction for structured vehicles. Can you give us some reasons?
It is true that with the implementation of the Luxembourg act of 22 March 2004 on securitisation, as amended (the Securitisation Act 2004), Luxembourg has become an attractive jurisdiction for structured finance and securitisation vehicles.
The Luxembourg legislator has created a modern framework offering significant investor protection, a high level of legal certainty for all parties involved in the securitisation transaction, as well as great flexibility. The Securitisation Act 2004 provides originators with a modern, tax-efficient way to obtain new financing.
The restrictive view of the regulator has been relaxed regarding securitisation of commodities. What does the CSSF’s new approach look like?
Until now the securitisation of commodities has been considered by the CSSF as permissible only in very limited circumstances. The CSSF has approved structures under which a securitisation undertaking acquires commodities with a view to providing financing to a third party and where the acquired commodity serves as a guarantee for the repayment of the funds made available to that third party.
Structures where a commodity serves as an underlying asset (rather than as a guarantee) were rejected by the CSSF as they were categorised as pure investment structures and not securitisations in the sense of the Securitisation Act 2004 .
This restrictive approach has now been considerably relaxed: the CSSF now accepts structures where a securitisation vehicle issues securities and uses the issue proceeds to purchase commodities, the performance of which will determine the return generated by the securities.
It must however be ensured that:
- the structure does not amount to a commercial activity requiring a business licence under the Luxembourg act of 28 December 1988 relating to establishment of certain businesses and business licences, as amended; and
- the structure does not give rise to further risk for the securitisation undertaking, in addition to the risk inherent to the securitised commodity.
As a general comment in relation to the above, it should be noted that the CSSF is only competent to express views on transactions carried out by securitisation vehicles falling under its supervision (that is, regulated securitisation undertakings, as specified in the Securitisation Act 2004).
However, the Luxembourg tax administration tends to apply the guidelines and criteria set out by the CSSF to all securitisation vehicles (whether or not they are subject to CSSF supervision) in order to ensure that transactions carried out by such vehicles constitute securitisation transactions within the meaning of the Securitisation Act 2004, which benefit from the very favourable tax regime provided by the Securitisation Act 2004.
In other words, non-compliance by securitisation vehicles with CSSF guidelines exposes securitisation vehicles to the risk of losing the favourable tax regime of the Securitisation Act 2004.
Was this approach influenced by practical or political considerations?
Undeniably, there is strong appetite for the type of securitisation transactions involving commodities which will be facilitated further to this change of position (and which were already allowed in other jurisdictions). Hence, the CSSF's move can be seen as a means to ensure that Luxembourg preserves its attractiveness in the field of securitisation and gets its share of the market for this type of products.
Can we say that this change of approach opens a whole new market for issuers?
This new CSSF position opens a whole new market for issuers subject to the Securitisation Act 2004. It provides originators of commodities with an interesting alternative for obtaining financing. New opportunities arising out of this change in position will strengthen the position of Luxembourg as a European hub for securitisation transactions.
Is Luxembourg already a European hub for securitisation vehicles?
Since the entry into force of the Securitisation Act 2004 (but even before that act), Luxembourg has clearly developed as a dominant platform for international securitisation transactions.
If so, what are its main competitors?
A number of European countries have implemented their own securitisation regimes. Next to France's recent new regime for fonds communs de titrisation, the main European competitors are often considered to be the Netherlands and Ireland. Without entering into a detailed analysis of the different regimes, one can say that the Luxembourg framework bears a number of advantages compared to these jurisdictions.
What makes securitisation vehicles attractive?
The popularity of securitisation undertakings derives from the favourable legal and tax regime to which they are subject. In summary, the most notable benefits are:
(i) the possibility of creating ring-fenced compartments to which all the rights of investors in a particular series of securities may be allocated: each compartment forms an independent, separate and distinct part of the securitisation undertaking's estate and is segregated from any other compartments of the securitisation undertaking. Investors will only have recourse to the assets comprised in the compartment to which the securities they hold have been allocated;
(ii) the Securitisation Act 2004 expressly recognises the validity of non-petition, limited recourse and subordination clauses. Any proceedings instituted in breach of this will be declared inadmissible;
(iii) the range of assets that may be securitised is extremely broad: in essence, the Securitisation Act 2004 allows for almost any asset producing a regular flow of income or any risk to be securitised. This includes risks relating to tangible (movable or immovable) assets and synthetic transactions. There is no risk-diversification requirement and no requirement as to the homogeneity of the assets to be securitised;
(iv) the favourable tax regime of securitisation undertakings which are subject to the Securitisation Act 2004: A securitisation vehicle is a fully taxable company. There is no requirement that it makes a minimum profit. All payments made by the securitisation vehicle in respect of issued securities (be they debt securities or equity securities) are fully tax-deductible expenses for the securitisation vehicle. Securitisation vehicles benefit from the wide network of tax treaties entered into by Luxembourg.
Did securitisation transactions suffer from a bad press due to the financial crisis?
Clearly, the concept of "securitisation" itself has suffered from bad press in the course of the recent financial crisis. One should however not limit the concept of securitisation to the repackaging of US mortgage loans. The scope of what can be done by way of securitisation is considerable.
Investor protection and investor information should be of paramount importance in this field. Needless to say that Luxembourg has implemented relevant EU directives aimed to ensure adequate investor information. Investor protection is also one of the key drivers of the Securitisation Act 2004. CW
 Pursuant to article 1, paragraph 1 of the Securitisation Act 2004, "securitisation […] means a transaction by which a securitisation vehicle acquires or assumes, directly or through another undertaking, risks relating to claims, other assets, or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues securities, whose value or yield depends on such risks."