One of Luxembourg’s big advantages has always been its small size, which has allowed successive governments to introduce new rules with a speed and nimbleness that bigger nations would struggle to replicate.
Time and again, the Grand Duchy has used speedy and favourable regulation to bolster its financial sector.
It is a consistent, first mover-based approach which has helped to cement its place as one of Europe’s leading financial services hubs, especially for the domiciling of funds by private equity firms and asset managers.
A new draft securitisation law working its way through Luxembourg’s parliament – which will reform existing rules created in 2005 – is the latest example of this trend, according to Sandra Bur, head of capital markets Luxembourg at Ocorian, a provider of fund administration, capital markets and fiduciary services.
Although the bill has not yet entered the statute books, Bur believes it will represent a major boost to the Grand Duchy’s appeal for private equity firms eager to make use of tax efficient securitisation structures domiciled in the country.
“It will position Luxembourg, even more favourably as the location of choice for European securitisation deals,” she says.
Securitisation structure
Around the world, private equity firms are well known for their extensive use of partnerships to structure their investments, she explains.
Until now, existing laws in Luxembourg have restricted the use of these structures using the specific company type required for a partnership – the model favoured by the private equity industry.
The new bill changes that, however, by opening up new opportunities for securitisation transactions to take place through partnerships in ways that were not previously possible.
“The world of securitisation that was previously unavailable to most key structures and transactions would now very much be an option for them,” she says, describing the reformed law as “the cherry on the cake” of existing rules that have helped grab Luxembourg an 8.8 per cent slice of the global fund domicile market.
So what does this mean for private equity players?
”It enables a diverse set of investors to participate over time and across a broad selection of risk return profiles,” Bur says.
“It will also add new capital to the industry and provide liquidity to note holders in case they want to sell [their] notes, as these are freely tradable, as opposed to the burden and complex process of selling a limited partnership interest.”
With offices in 16 jurisdictions, Ocorian’s Luxembourg office is largely focused on providing fund administration and corporate services to underlying Special Purpose Vehicles.
Currently, a securitisation vehicle domiciled in Luxembourg must either be established as a public or private limited liability company. New legal structures offer flexibility.
But the draft bill will introduce four additional legal forms that can be used for establishing securitisation companies, offering a new degree of flexibility.
These include Special Limited Partnerships, Simple Limited Partnerships, General Corporate Partnerships and Simplified Joint Stock Companies.
“This expands Luxembourg’s product offering, and allows more flexibility and efficiency in the structuring of transactions in particular through the SNC [general corporate partnership] and the SCSp [special limited partnership] which are transparent for Luxembourg tax purposes,” Bur says.
“This would mean for the first time that a securitisation vehicle could be a tax transparent vehicle without needing to be set up as a fund. This will be welcome given the introduction of the Anti-Tax Avoidance Directive (ATAD) and its impact on Luxembourgish securitisation vehicles. Indeed, it will be a great relief to many to have this option to circumvent the difficulties posed by the ATAD legislation.”
She continues: “By allowing securitisation companies to take the form of tax transparent structures, we give clients the flexibility to structure a securitisation vehicle through Luxembourg in a tax transparent way.”
European CLOs
The new rules also have sweeping implications for the European Collateralised Loan Obligation (CLO) market, which is gaining in popularity as investors hunt for yield in an era of historically low interest rates, Bur explains.
The draft bill proposes a new article that specifically permits active management of securitisation vehicles for risks linked to bonds, loans or other debt instruments as long as these are issued under private placement.
Active management
Under Luxembourg’s existing law, active management of CLO funds has not been possible, placing the Grand Duchy at a big competitive disadvantage compared to rival jurisdictions such as Ireland, which has consequently emerged as Europe’s key hub for domiciling CLO funds.
Bur says: ”Permitting the active management of securitisation vehicles in Luxembourg would significantly strengthen the country’s securitisation proposition and likely attract CDO/CLOs back to Luxembourg as opposed to Ireland which is currently the jurisdiction of choice for CLOs, with assets in Irish-domiciled CLOs rising to EUR170 billion by April 2021.”
In practice, this will mean that if the draft law is adopted, securitisation vehicles will no longer be confined to a ‘buy and hold’ CLO strategy. Instead, they will finally be able to make active investing decisions on the assets within the CLO, enabling the portfolio to adapt to market developments.
Taken together, the reforms represent a powerful boost for the industry as it pushes to bolster its reputation as a leading global fund hub, Bur says.
“The changes proposed to Luxembourg’s securitisation regime by the Bill of Law have been welcomed by the Luxembourg financial services industry,” she adds.
“In my humble opinion, if these new flexibilities and frameworks are well-advertised by the key players of the market, this should place Luxembourg in an even more excellent place for securitisation transaction in Europe.”
