Luxembourg Sesuritisation Vehicles brochure

Luxembourg Securitisation Vehicles

STRUCTURED FINANCE

Luxembourg has since a long time been at the forefront of the financial markets’ and the structured finance’s trends and evolutions.

Over the years, it grew to become a hub for securitisation and structured finance transactions with one of the world’s safest business environment, notably as a result of its financial, political and social stability and innovative approach towards the financial sector.

Issuers and investors in Luxembourg benefit from strong and stable regulatory and tax frameworks, in line with European Union directives and regulations.

3Luxembourg Securitisation Vehicles

Luxembourg Securitisation VehiclesThe Luxembourg law of 22 March 2004 on securitisation,

as amended (the Securitisation Law), together with

the Luxembourg law of 10 August 1915 on commercial

companies, as amended (the 1915 Law), govern

Luxembourg securitisation vehicles (SVs). The purpose

of the Securitisation Law was to create a comprehensive,

flexible and reliable legal and tax framework for

securitisation transactions carried out by Luxembourg

SVs. Not only the Securitisation Law aims at protecting the

interests of the investors, but also of the creditors of the

SV. The Securitisation Law also enables the securitisation

of a large range of asset classes. Since the entry into

force of the Securitisation Law more than a decade ago,

the number of SVs incorporated in Luxembourg has

been steadily growing. A considerable number of SVs

are nowadays active in Luxembourg for the purpose of

securitising assets located all over the globe.

Definition of securitisation and types of SVs

“Securitisation” is defined in the Securitisation Law as

the transaction by which a securitisation undertaking

(organisme de titrisation) acquires or assumes, directly

or indirectly 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 (valeurs mobilières), the value

or yield of which depends on such risks.

The Securitisation Law recognises three types of SVs:

(i) securitisation undertakings that carry out the

securitisation in full (i.e. they acquire the securitised

risks and issue the corresponding securities);

(ii) securitisation undertakings that essentially participate

in the securitisation transaction by assuming all or part

of the securitised risks (i.e. the acquisition vehicles);

and

(iii) securitisation undertakings that essentially participate

in the securitisation transaction by issuing securities

to ensure the financing of the securitisation (i.e. the

issuing vehicles).

The SV’s articles of association, management regulations

or issuance documentation have to include a specific

reference and submission to the Securitisation Law.


Legal forms

An SV can be structured as a company or as a fund.

An SV company may be set up as a public limited liability

company (société anonyme) (S.A.), a corporate partnership

limited by shares (société en commandite par actions), a

private limited liability company (société à responsabilité

limitée) (S.à r.l.) or a cooperative company organised as

a public limited liability company (société coopérative

organisée comme une société anonyme). The minimum

share capital for a société anonyme and a société à

responsabilité limitée is respectively EUR 30,000 and

EUR 12,000.

An SV may also be set up as a co-ownership of assets

(without legal personality), a so-called securitisation fund,

managed by a Luxembourg-based management company

(société de gestion) in accordance with its management

regulations. The securitisation fund may further be set up

under a fiduciary arrangement, whereby the assets are

held by the fiduciary for the account of the investors.

Compartmentalisation

Luxembourg SVs may be compartmentalised, meaning

that the estate of an SV can be segregated into different

compartments, each representing a distinct part of

the assets and liabilities of the SV. In other words, the

compartmentalisation enables a segregation of the assets

and liabilities of the SV among various compartments,

whereby such assets and liabilities are by law ring-fenced

on a compartment-by-compartment basis, including in the

case of insolvency of the SV. The rights of recourse of the

investors and creditors are as a rule limited to the assets of

the SV. Where such rights relate to a specific compartment

or have arisen in connection with the creation, operation or

liquidation of a specific compartment, the recourse of the

relevant investors and creditors is then limited to the assets

of that compartment. Among investors, each compartment

is treated as a separate entity, unless otherwise specified in

the constitutional documents of the SV.

Compartmentalisation must be authorised in the

constitutional documents of the SV and the creation of one

or more compartments is entrusted to the management

body of the SV.

Financing

The acquisition of the securitised risks by an SV must

be financed through the issuance of securities (valeurs

mobilières), the value or yield of which is linked to

such risks. There is no definition of securities in the

Securitisation Law. The Luxembourg Supervisory

Commission of the Financial Sector (Commission

de Surveillance du Secteur Financier) (the CSSF)

considers in its Frequently Asked Questions guidance on

securitisation issued in 2013 (the Securitisation FAQ)

that (i) instruments that are considered as securities under

their governing law (lex contractus) and (ii) instruments

that constitute securities within the meaning of Directive

2004/39/EC of 21 April 2004 on markets in financial

instruments (the MiFID), are deemed to be securities

for the purpose of the Securitisation Law. Shares (parts

sociales) and bonds issued by SVs organised as private

limited liability companies (S.à r.l.) also qualify as securities

for the purpose of the Securitisation Law.

An SV may issue equity and debt securities in bearer,

registered or dematerialised form (subject to the limitations

set forth by the 1915 Law). There is a high degree of

contractual flexibility and, accordingly, an SV may issue

securities whose value or yield is linked to specific

compartments, assets or risks, or whose repayment is

subject to the repayment of other instruments, certain

claims or certain categories of shares. Insolvency

remoteness can be achieved through the use of limited

recourse, non-petition and subordination provisions in the

issuance or constitutional documents of the SV.

An SV may temporarily use loans in order to pre-

finance the acquisition of the assets to be securitised

in advance of the actual issuance of the securities (i.e.

warehousing). Otherwise, borrowing can only be used

on an ancillary basis (e.g. liquidity facilities in case of

lack of synchronisation between the cash flows relating

to the securitised assets and the financial flows relating

to the securities issued by the SV) and/or in the case

a credit line is temporarily necessary for the purpose

of the securitisation. Borrowing can also be used to

improve the investors’ return. In this scenario, borrowing

is only acceptable if the financing of the securitisation

transaction also includes the issuance of securities for

a proportionally substantial amount. In each case, the

issuance documentation must disclose any additional risks

for investors resulting from such leverage.

SVs do not have to comply with any debt/equity ratios.

6

Securitisable risks

Risks relating to the holding of assets, whether movable

or immovable, tangible or intangible, as well as risks

resulting from the obligations assumed by third parties or

relating to all or part of the activities of third parties, may

be securitised. Securitisation transactions in Luxembourg

typically involve a wide range of assets, such as

commercial loans, mortgage loans, car lease receivables,

consumer credits, non-performing loans, commodities,

income from operating businesses, etc.

The CSSF has confirmed in its Securitisation FAQ that in

specific circumstances an SV may originate loans, and this

operation will be regarded as a securitisation, provided

the SV does not use funds collected from the public to

engage in credit activities for its own account and that

the issuance documentation of the securities (a) clearly

defines the assets on which the service and the repayment

of the loans granted by the SV will depend or (b) clearly

describes (i) the borrowers and/or (ii) the criteria for the

selection of the borrowers, in order to allow investors to

gain adequate knowledge of the risks (including credit risk)

and the return on their investments at the time of issuance

of the securities. In each case, the features of the loans

granted by the SV have to be described in the issuance

documentation. In presence of loans originations, particular

attention should be paid to the passive management

requirement for SVs.

The CSSF further accepts the securitisation of

commodities (or similar assets) to the extent that the

acquisition of such commodities aims at providing

financing to an entity and that the commodities constitute

a collateral securing the repayment obligations of such

entity. The SV may also issue securities in the form of

structured products providing investors with an exposure

to the price fluctuations of the underlying commodities.

Acquisition of securitised risks

The SV may assume the securitised risks by acquiring the

assets directly, by using credit derivatives or by committing

itself in any other way. Securitisation transactions (notably

transactions involving the use of credit derivatives) do not

constitute insurance activities subject to the Luxembourg

law of 6 December 1991 on the insurance sector, as

amended.

According to the Securitisation Law, the law governing

the assigned claims determines the assignability of such

claims, the relationship between the assignee and the

debtor, the conditions under which the assignment is

effective against the debtor and the conditions for the valid

discharge of the debtor’s obligations. The assignment

of an existing claim to, or by, an SV becomes effective

between the parties and against third parties as from

the moment the assignment is agreed upon among the

parties (unless agreed otherwise). Future claims may

also be assigned. The assignment of a claim to, or by, an

SV entails the transfer of the underlying guarantees and

security interests securing such claim.

Listing in Luxembourg

Luxembourg is a worldwide leader for the listing of

securities. The Luxembourg Stock Exchange (the LuxSE)

was founded over 80 years ago and has always been at

the forefront of listing innovations, notably by being the

first exchange to list an Eurobond in 1963, a Sukuk in

2002 and a Schengen bond in 2014. To date, the LuxSE

operates two markets: (i) the regulated market (within the

meaning of MiFID), which falls within the EU harmonised

regime (the Regulated Market) and (ii) the exchange

regulated market, set up in 2005 as a multilateral trading

facility within the meaning of MiFID which provides an

alternative market to the Regulated Market (the Euro

MTF).

The LuxSE has a longstanding experience in the listing

of asset-backed securities. According to figures recently

published, the LuxSE has over 3,500 asset-backed

securities listed on its two markets issued by more than

650 issuers from more than 37 countries. The LuxSE is

committed towards a cost efficient and client oriented

listing process. Combined with a favourable regulatory and

tax regime, this makes Luxembourg the ideal venue for

securitisation transactions.


Supervision

Luxembourg SVs are in principle unregulated entities not

subject to any authorisation or prudential supervision,

unless they issue securities to the public on a continuous

basis. In the latter case, the SV must be authorised by

the CSSF. According to the Securitisation FAQ, an SV is

deemed to issue securities on a continuous basis where

it makes more than three issues to the public per year.

For multi-compartments SVs, this threshold is determined

at the level of the SV on a consolidated basis and not at

the level of each compartment. The concept of public

is not defined in the Securitisation Law, and differs from

the notion of “offer to the public” under the Law of 10

July 2005 on prospectuses for securities, as amended,

implementing Directive 2003/71/EC of 4 November 2003

on the prospectus to be published when securities are

offered to the public or admitted to trading, as amended

(the Prospectus Directive).

The CSSF considers that in certain circumstances, issues

of securities will be considered not to be made to the

public. This is the case for issues of securities exclusively

addressed to professional clients (as defined in Annex

II of MiFID) which are not considered to be made to the

public for the purpose of the Securitisation Law. Securities

having a nominal value of at least EUR 125,000 each

are also assumed to have not been issued to the public.

The Securitisation FAQ further indicates that a listing of

securities issued by an SV does not automatically result

in the securities being viewed as issued to the public. As

a rule, private placements of securities do not constitute

issuances to the public. However, the characterisation of

private placement is assessed on a case-by-case basis by

the CSSF and, for example, the subscription of securities

by an institutional investor or financial intermediary with

a view to a subsequent placement of such securities to

the public qualifies as an issue made to the public for the

purpose of the Securitisation Law.

Whereas unregulated SVs are not required to appoint a

custodian bank, regulated SVs have to entrust the custody

of their liquid assets and securities with a credit institution

established or having its registered office in Luxembourg.

The annual accounts and financial statements of both

regulated and unregulated SVs have to be audited by one

or more independent auditors (réviseurs d’entreprises

agréés). Where several compartment have been created,

each will have to be separately detailed in the financial

statements of the SV. According to the Securitisation

FAQ, financial information relating to each compartment

must be clearly identifiable and the approved independent

auditor (réviseur d’entreprises agréé) must assess the

proper drawing up of the annual accounts in light of the fair

view principle both at the level of the SV as a whole and

separately at the level of each compartment.

Reporting obligations

Both regulated and unregulated SVs qualify as

financial vehicle corporations engaged in securitisation

transactions and have to comply with the reporting

obligations laid down in (i) Regulation ECB/2013/40 of the

European Central Bank of 18 October 2013 concerning

statistics on the assets and liabilities of financial vehicle

corporations engaged in securitisation transactions (the

Regulation ECB/2013/40) and (ii) circular 2014/236

of the Luxembourg Central Bank (BCL) dated 25 April

2014 on statistical data collection for securitisation

vehicles (Circular 2014/236). Circular 2014/236 lays

down an initial registration obligation on Luxembourg

SVs and ongoing and periodic reporting obligations. The

ongoing reporting obligations apply to all SVs and include

notifications to the BCL in case the SV is liquidated or in

presence of major changes to the information provided at

the time of registration. SVs whose balance sheet exceeds

certain thresholds will also need to comply with the

periodic reporting obligations towards the BCL, including

quarterly reports and monthly reports. In order to induce a

timely registration and proper reporting, the BCL recently

indicated in its Circular Letter dated 24 May 2016 that

a database for non-compliance with Circular 2014/236

will be set up by the BCL in view of better monitoring

defaulting SVs.

When entering into derivatives contracts, SVs will fall within

the scope of Regulation (EU) No 648/2012 of 4 July 2012

on over the counter derivatives, central counterparties and

trade repositories (EMIR). As a result, SVs may be subject

to the reporting obligations and, where applicable, other

obligations (e.g. clearing) under EMIR and related rules and

regulations. The Luxembourg Parliament voted the law of

15 March 2016 on OTC derivatives, central counterparties

and trade repositories, aiming at ensuring the effective

implementation of EMIR and granting sanctioning powers

to the CSSF in order to guarantee the correct application

of rules and requirements deriving from EMIR.


AIFMD

Directive 2011/61/EU of 8 June 2011 on Alternative

Investment Fund Managers (the AIFMD) and the

Luxembourg law of 12 July 2013 on alternative

investment fund managers (the AIFM Law) do not apply

to securitisation special purpose entities (SSPE). SSPEs

are defined in the AIFMD as entities whose sole purpose

is to carry on a securitisation or securitisations within the

meaning of Regulation ECB/2008/30 of the European

Central Bank of 19 December 2008 concerning statistics

on the assets and liabilities of financial vehicle corporations

engaged in securitisation transactions and other activities

which are appropriate to accomplish that purpose

(Regulation ECB/2008/30). Regulation ECB/2008/30

has been repealed with effect as from 1 January 2015 by

Regulation ECB/2013/40.

According to the Securitisation FAQ, securitisation vehicles

issuing collateralised loan obligation (CLOs) are considered

as being engaged in securitisation transactions and as a

result, are not subject to the AIFM Law. In contrast, entities

which primarily act as a “first” lenders (i.e. originating new

loans) are not considered as being engaged in securitisation

transactions and will thus fall within the scope of the AIFM

Law. The same applies to SVs issuing structured products

that primarily offer a synthetic exposure to assets other than

loans (non-credit-related assets) and where the credit risk

transfer is only ancillary.

Independently from their potential qualification as SSPE

(for the purpose of the AIFMD), SVs which only issue debt

instruments should not, pursuant to the Securitisation

FAQ, constitute alternative investment funds (AIFs) for the

purpose of the AIFM Law. Similarly, irrespective of the fact

whether SVs qualify as SSPE for the purpose of the AIFMD,

it is the view of the CSSF that SVs which are not managed

in accordance within a “defined investment policy” (within

the meaning of the AIFM Law) do not constitute AIFs.

Management of assets

An SV must have a passive attitude when managing

its assets. The role of the SV should be limited to the

administration of financial flows linked to the securitisation

transaction itself and to the ‘prudent-man’ management

of the securitised risks, and exclude all activities likely to

qualify the SV as entrepreneur (for example, by providing

of services to third parties). Any management by the SV of

claims, assets or activities of third parties that creates an

additional risk in addition to the risk inherent to such claims,

assets or activities or which aims at creating additional

wealth or promoting the commercial development of the

SV’s activities would be incompatible with the Securitisation

Law, even if the actual management of the assets and

activities has been delegated to an external service

provider.

An SV may entrust the assignor or a third party with the

collection of the securitised receivables, as well as other

management tasks, without such persons having to apply

for an authorisation under the Luxembourg law of 5 April

1993 on the financial sector, as amended.

An SV cannot assign its assets, except in accordance with

the provisions set forth in its constitutional documents. It

may only grant security interests over its assets in order to

secure the obligations it has assumed for their securitisation

or in favour of its investors. Security interests and

guarantees created in violation of this restriction are void by

operation of law.

Taxation

Corporate taxation

An SV company is fully subject to Luxembourg corporate

income tax (CIT) and municipal business tax (MBT) on

its worldwide income. For the fiscal year 2017, the CIT

rate is 20.33% (including the 7% solidarity surcharge

for the employment fund) and the MBT rate is 6.75% in

Luxembourg City. As a result, the current aggregate rate is

27.08% for the fiscal year 2017 in Luxembourg City.

An SV company benefits from a special tax deduction right

which aims to achieve tax neutrality. Under such right,

commitments (engagements) vis-à-vis investors and creditors

are tax-deductible. As a result, interest on debt instruments

and commitments to pay out dividends to equity holders are

considered as tax-deductible for income tax purposes.

As from 2016, an SV company is subject to a minimum

annual net wealth tax (NWT). For the fiscal year 2017, if

the sum of fixed financial assets, transferable securities and

cash at bank of the SV company exceeds 90% of its total

gross assets and EUR 350,000, the minimum NWT charge

would be set at EUR 4,815. If not, the minimum NWT charge

10

would range from EUR 535 to EUR 32,100 depending on

the SV company’s total gross assets amount. As the assets

of an SV company generally consist of at least 90% financial

type assets, the annual minimum tax should not exceed

EUR 4,815.

As SV companies are fully taxable Luxembourg-resident

companies, they should be considered as “liable to tax” in

the sense of tax treaties and therefore qualify as resident

under such tax treaties. A resident under a tax treaty is

generally entitled to its benefits. Ultimately, the relevant

source country must confirm whether tax treaty benefits are

granted to SV companies. SV companies should also be

entitled to the benefits of European Directives (e.g. Directive

2015/121 of 27 January 2015 on the common system

of taxation applicable in the case of parent companies

and subsidiaries of different Member States or Directive

2009/133/EC of 19 October 2009 on the common system

of taxation applicable to mergers, divisions, partial divisions,

transfers of assets and exchanges of shares concerning

companies of different Member States).

Similarly, a fund type SV is transparent for tax purposes,

hence it will not be subject to CIT, MBT or minimum annual

NWT. A fund type SV should generally not qualify as a

resident under tax treaties and should therefore generally

not be entitled to treaty (or European Directives) benefits.

Withholding tax and non-resident taxation

Interest and dividend payments to investors by an SV

company are not subject to Luxembourg withholding tax.

Distributions by a fund type of SV are also not subject to

withholding tax. Concerning SVs which have issued shares,

non-resident shareholders (those without a Luxembourg

permanent establishment to which the shares of an SV

company are allocable) are only taxable in Luxembourg

when they realise a capital gain in respect of an important

shareholding (generally at least a 10% shareholding) in

an SV company within six months after the acquisition of

the shares, or they became non-resident taxpayers less

than five years before the disposal took place, after being

Luxembourg-resident taxpayers for more than 15 years.

However, shareholders who reside in a country with which

Luxembourg has a tax treaty in force should generally

not be taxable on such capital gains, if an exemption is

provided for in the treaty.

VAT

Management services provided to an SV benefit from a

VAT exemption and VAT leakage is therefore reduced to

a minimum. As long as they are specific and essential to

the management of the SV, collateral management fees

and investment advisory fees may be considered to be

covered by this exemption. Subscription, underwriting and

placement fees may also be VAT exempt based on the

general exemption of fees on the negotiation of securities.

Other

Agreements entered into in the context of a securitisation

transaction and all other instruments relating to such

transaction are not subject to registration formalities, even

when referred to in a public deed or produced in court or

before any other public authority, provided that they do not

have the effect to transfer rights which must be transcribed,

recorded or registered and which relate to immoveable

property located in Luxembourg, or to aircraft, ships or

riverboats recorded on a public register in Luxembourg.

Conclusion

The Luxembourg legal environment provides for an enviable

regime for the structuring of securitisation transactions.

With its flexible, lightly regulated and tax efficient regime,

the framework shaped under the Securitisation Law has

contributed to the success of Luxembourg as a key player

in structured finance. A wide range of attractive vehicles

is available for multiple actors to carry out securitisations

and structured finance transactions through Luxembourg.

In addition, the diversity in terms of financing techniques

and eligible assets under the Securitisation Law is making

Luxembourg a prime location for securitisation transactions,

whose success is repeatedly confirmed over the years.


About Loyens & Loeff

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financial institutions, investment funds and family offices.

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Switzerland, and seven in important financial centres of

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Contact information

Vassiliyan Zanev

T +352 466 230 257

[email protected]

Arnaud Barchman Wuytiers van Vliet

T+352 466 230 311

[email protected]

Loyens & Loeff Luxembourg S.à r.l.

Avocats à la Cour

18-20, rue Edward Steichen

L-2540 Luxembourg

T +352 466 230

F +352 466 234

Peter Adriaansen

T +352 466 230 451

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Frank van Kuijk

T +352 466 230 330

[email protected]

Disclaimer

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partnerships, persons and practices trading under the name “Loyens & Loeff”, cannot accept any liability for the

consequences of making use of this issue without their cooperation. The information provided is intended as general

information and cannot be regarded as advice.

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Luxembourg Sesuritisation Vehicles brochure