While the global CLO (Collateralised Loan Obligations) market amounts to approximately $1 trillion, it is significantly more developed in the US than in Europe – with an asset split of approximately 70:30. CLOs are portfolios that pool loans to companies or private equity players that wish to make leveraged buyouts. After their repurchase, these loans are securitised and resold in different tranches to investors.
Offering the possibility of a higher return than traditional investments, CLOs are quickly becoming more attractive on the European continent: according to a recent Fitch report, a record 94 new CLOs were issued in 2021 for a total amount of €38.5 billion. In 2019, issuance in Europe reached €29.9 billion before falling to €22.1 billion in 2020 given the pandemic.
A bill that will amend the 2004 law on securitisation activities has been submitted to Luxembourg’s parliament. Among the various new measures provided for in the text, one is of particular interest. Should the draft bill be put into law, it will be possible for a securitised undertaking, under certain conditions, to carry out the active management of various assets.
Luxembourg, together with Ireland, remains the location of choice for securitisation activities – currently there are approximately 1,300 securitisation vehicles in Luxembourg, comprising of approximately 9,000 compartments. However, until now, securitisation activities in the financial centre could only be carried out passively, i.e. grouping together debts and receivables acquired in a portfolio and managing them according to a “buy and hold” principle.
By allowing active management, the revised law make them significantly more attractive, especially for CLO managers who frequently adjust their loans and receivables in the portfolio in order to ensure the best possible return.
While, if the new law is passed, it will undoubtedly boost activities within Luxembourg’s ecosystem, the active management will be subject to certain limitations: CLOs are reserved for professional investors and are solely structured using unregulated vehicles. This is also in line with calls from the market, with CLO managers and private equity firms looking to ensure greater structuring flexibility within their leveraged loan portfolios.
The new opportunity will additionally be of benefit to Luxembourg’s private equity ecosystem by providing an opportunity for firms already present in the country to consolidate their activities by repatriating the portfolio management activity of CLOs, which is currently based abroad. This will serve as an opportunity to reduce operational costs as they will be able to actively manage their CLO portfolios in-house, via the unregulated securitisation vehicle.
However, the active management of CLOs from Luxembourg also represents an opportunity for management companies providing third-party fund services as they would be able to be appointed by sponsors to provide this management.
For the country’s financial services ecosystem, this diversification in CLO management could bring about new skills and additional jobs through the relocation of CLO portfolio management specialists to Luxembourg. These measures, which would also be accompanied by the upskilling of existing talent, mark a further step in the ongoing transition of Luxembourg’s financial services from back-office activities to middle- and front-office.
And for fund managers looking to develop new activities in Europe, Luxembourg could become a reference hub for CLOs as well.