What’s your risk/reward appetite?
The European securitisation market fell by almost 40% in 2011. Since 2008, three years of decline have been observed, mainly due to the subprime mortgage scandal in the US and the European sovereign debt crisis. Although the securitisation market decreased in recent years, it is once again a large contributor to the global capital markets, according to PwC Luxembourg.
Historically, asset securitisation began with the structured financing of mortgage pools in the 1970s. All in all, securitisation is a type of structured financing in which a pool of financial assets is transferred from an originating company to Special Purpose Vehicle (SPV). This SPV subsequently issues debt packages backed by the assets transferred and payments derived from these underlying assets purchased with the proceeds of the issuance.
Structuring is one of the central elements of a securitisation transaction. It typically splits the credit risk into several risk tranches with different risk profiles. So what are the benefits of securitisation? For the originator, this type of financing provides efficient access to capital markets, converts illiquid assets to cash and transfers risks to third parties. The benefits for the investor are, amongst others, portfolio diversification, higher returns and broad combinations of yield, risk and maturity, according to the brand new PwC brochure Securitisation in Luxembourg.
Restoring clients’ confidence
Despite all these benefits known to originators and investors, the securitisation market needs to heal its damaged reputation. Holger von Keutz, Partner and Securitisation Leader at PwC Luxembourg, said that the lessons from the crisis have been learned. “There has been a noticeable trend towards simpler structures and more transparency. Securitisation as such is a good financial product from which investors and originators can mutually benefit, which eventually leads to lower financing costs. But what we have seen, especially in the US, is that securitisation was misused. And every time it is misused, its reputation is damaged.”
Since the introduction of the Luxembourg Law of March 22 2004 on securitisation, the local market has been developing quite strongly. A total of 887 securitisation vehicles were established by the end of March 2012. The PwC partner believes that this consistent growth illustrates the advantages that the Luxembourg law offers to originators, investors and creditors.
Holger von Keutz spoke about the three major advantages of the 2004 law: “Great flexibility, strong investor protection, and the possibility to structure a nearly tax-neutral securitisation vehicle. As an example of flexibility, let me mention the possibility of setting up a securitisation company with many compartments. I believe this is really unique. Although other jurisdictions do allow some kinds of compartments, it usually implies structures with separate silos, which can be very complex to set up and require a great deal of legal contracts.” In Luxembourg, it’s in the law itself. The law says that you can set up compartments that represent separate parts of assets and liabilities.
Company or fund?
PwC estimates that nearly 3,000 compartments have been created within the 887 existing vehicles. The outlook for the securitisation business in Luxembourg is positive. A number of retail investment products using securitisation vehicles with assets from Russia, Eastern Europe and Germany have been set up over the past years. Originators of these vehicles are also able to choose between different forms of vehicles, they can either set up a securitisation company or a securitisation fund.
They can also choose to be supervised or unsupervised. “The supervised vehicles are used for retail clients, since the supervision by the CSSF improves a product’s reputation with investors, while unsupervised vehicles are more often used in connection to informed institutional investors such as large pension funds or insurance companies.”
In the new PwC brochure, there is also a summary of the Luxembourg financial centre’s key assets, which render the securitisation law more attractive. There is also enormous flexibility in entity establishment from a cost and structural point of view, legal certainty, and broad bankruptcy remoteness mechanisms, tax neutrality and qualified service providers. CW
Photo: © PricewaterhouseCoopers S.à.r.l - Photographer: Blitz Agency