Luxembourg Securitisation Vehicles (by CRS)
Key takeaways:
Compartmentalisation (Page 4)
A particularly useful tool in order to organise the bankruptcy remoteness of an SV is the possibility to create several compartments within the same entity, in order to allow each compartment to correspond to a distinct pool of assets financed by distinct securities.
The sole requirement for using this mechanism is that the constitutional documents of the SV should expressly authorise the management to create such compartments.
The compartments allow a pool of assets and corresponding liabilities to be managed separately, so that the performance of one compartment shall not be impacted by the risks and liabilities of the other compartments.
Therefore, each compartment could be treated as a separate entity performing distinct transactions so that, as a result, the assets of a compartment are exclusively available to satisfy the rights of investors in relation to that compartment and the rights of creditors whose claims have arisen in connection with the creation, the operation or the liquidation of that compartment.
This means that, at the opposite, no recourse shall be possible against the assets allocated to other compartments in case that their respective claims have not been fully satisfied.
This mechanism also offers the possibility for an SV to issue several types of securities with different value, yields and redemption terms depending on the level of risks associated to the assets of each compartment.
Finally, each compartment could be liquidated separately or be subject to any bankruptcy proceeding without having any impact on the SV and the other remaining compartments.
What is the difference between a true sale securitisation and a synthetic securitisation? (P.4-5)
In a true sale securitisation, an SV acquires the legal and beneficial ownership of loans or other receivables from the originator, out of the proceeds of the issuance of securities whose repayment is linked to the cash flows generated from the acquired assets. The securitised assets are removed from the balance sheet of the originator who obtains cash in consideration thereof.
In a synthetic securitisation, an SV acquires the risks attached to underlying assets through derivatives or guarantees, hence creating new financial assets. The legal and beneficial ownership of the assets remains with the originator, who in fact acquires any kind of credit risk protection in consideration for the payment of swap premiums. The amount payable by an SV to the originator is usually calculated by reference to the loss in value that affects the underlying portfolio of assets. The counterparty risks may be immediately funded by the investors in the SV (e.g. as deposit or collateral) or remain as undrawn commitments of the SV against its investors. Any securitisation transactions governed by the Securitisation Law falls out of the scope of the insurance sector law.
When are the activities of an SV regulated? (Page 5)
Only the SV issuing securities to the public on a continuous basis must be regulated and supervised by the supervisory authority of the CCSF to carry out their activities. According to the CSSF, i) securities are not alleged to be issued to the public if they are issued with a minimum nominal value of EUR 125,000.- each and ii) an SV will not be considered to issue such securities on a continuous basis if it does not make more than three issuances 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...
When is an SV subject to the Prospectus Law? (Page 6)
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The Prospectus Law does not apply and the issuer is exempted to publish a prospectus in the following cases (this list being non-exhaustive):
• Qualified investors: an offer of securities addressed solely to qualified investors as such term is defined in the Prospectus Law, i.e. setting out a list of professional clients or recognised as eligible counterparties in accordance with the MiFID.
• Small offers: i) an offer of securities addressed to fewer than 150 natural or legal persons (being nonqualified investors) per Member State; (ii) an offer of securities addressed to investors who acquire securities for at least EUR 100,000, per investor, for each separate offer; iii) an offer of securities with denominations per unit for at least EUR 100,000, and iv) an offer of securities in all EU member States where the total consideration for the offer is less than EUR 100,000, calculated over a period of 12 months. It is noted that any subsequent resale of securities which have been previously subject to one of the exemptions above shall be regarded as a separate offer, i.e. it should be verified if the new offer meets the criteria for an exemption...
When shall the SVs be subject to the AIFM Law? (page 7)
Luxembourg law of 12 July 2013 on alternative investment fund managers (the AIFM Law) provides a regulatory and supervisory framework for managers of an Alternative Investment Fund (the AIF) and notably defines rules regarding the marketing of AIF and the substance and organisation of their managers.
The AIFM Law shall not apply to securitisation special purposes entities (SSPE), whose sole purpose is to carry out securitisation operations and, in general, to all SVs which only issue debt instruments and/or are not managed in accordance with “a defined investment policy”.
Subject to criteria set out in the ESMA guidelines, SVs which issue structured products offering synthetic exposure to assets (equities, commodities or indices thereof), and acquire underlying assets and/or enter into swaps with the sole purpose of covering the payments obligations arising from the issued structured products shall not be considered to be managed in accordance with “a defined investment policy”.
According to the clarifications provided by the European Central Bank, an SV issuing collateralised loan obligations would be considered as being engaged in securitisation transactions and, consequently, shall not be subject to the AIFM Law.
On the contrary, entities which primarily act as “first” lenders, i.e. originating new loans, shall not be considered as being engaged in such transactions and will fall within the scope of the AIFM Law accordingly.
Corporate taxation (Page 9)
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As a company fully subject to tax in Luxembourg, an SV company should benefit from most of the double tax treaties (Treaties) concluded by Luxembourg and should also be entitled to the benefits of the European Directives (EUD)...
Withholding tax and non-resident taxation (Page 9)
Distributions and other proceeds allocated to its investors by an SV company/fund are not subject to Luxembourg withholding tax...
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