Expanded means of financing
The bill expands the means of financing available to securitization undertakings, which will be permitted to fund themselves through any form of financing or any other financial commitment (financement ou tout autre engagement financier), and not solely through the issuance of financial instruments or the conclusion of loan agreements. Public offerings will continue to be financed exclusively by the issuance of financial instruments.
This change will, among other things, facilitate Islamic finance structures, where the use of the traditional debt financial instruments or loans is not permitted.
Asset segregation on management company insolvency
The bill reinforces the principle of asset segregation, confirming that the assets of a securitization fund managed by a management company do not form part of the management company’s insolvency estate in the event of its bankruptcy.
Cross-compartment investments
The bill permits a compartment of a securitization undertaking, subject to the conditions set out in its articles of association, management regulations or issuance documents, to invest directly or indirectly in one or more other compartments of the same securitization undertaking. It is to be noted that it expressly prohibits circular investments, by providing that a compartment may not invest in another compartment that has an existing investment in the first compartment.
Where a compartment invests in another compartment of the same securitization undertaking through financial instruments (other than units of a securitization fund, shares, partnership interests, and beneficiary units), loans or any other form of financial commitment, the investing compartment will enjoy all the rights of a creditor, including the right to exercise voting rights and to receive all income and financial proceeds attached to that investment. The bill expressly disapplies article 1300 of the civil code, thereby ensuring that a cross-compartment debt investment is not extinguished by operation of law.
Security and guarantees for third-party obligations
The bill refines the circumstances in which a securitization undertaking may grant security or guarantees over its assets. It confirms that such security or guarantees may be granted not only to secure the securitization undertaking’s own obligations, but also (i) to secure the obligations of a third party directly or indirectly connected with the securitization transaction, or (ii) to secure the obligations of a third party incurred in connection with a direct or indirect investment in the securitization transaction.
The proposed amendment responds to the increasing complexity of securitization structures following the 2022 reform, which notably permitted securitization undertakings to enter into credit agreements and, more broadly, a wider range of financing techniques.
In a market now characterized by multi-tier structures, cross-collateral arrangements, multiple classes of creditors and service providers operating at different levels of the transaction, the existing wording has given rise to divergent interpretations among practitioners.
The bill therefore seeks to clarify, rather than alter, the existing regime by restating more precisely the circumstances in which security and guarantees may be granted, in line with the broader objective of the 2022 reform to further clarify and adapt Luxembourg’s securitization framework to current market practice.
Wider scope of active management
The bill widens the scope of active management of the assets held by the securitization undertaking, so that it may apply to any category of securitized asset, including equity or fund instruments, rather than being limited to debt securities and claims, provided the relevant financial instruments are not offered to the public.
The amendment also introduces a list of categories of portfolio operations that are expressly excluded from the definition of active management, recognizing that even a passively managed portfolio cannot remain wholly static over the life of a transaction. These are:
- replacement of assets on actual default or proven risk of default
- replacement of assets ceasing to meet eligibility criteria defined in the management regulations or the issuance documents
- replacement of assets that do not conform to the representations or warranties provided by the originator to the securitization vehicle
- addition of assets during initial portfolio constitution, provided this phase does not exceed one-third of the total duration of the securitization transaction
- addition of assets during the life of the transaction in the context of continuous issuances
- replacement of assets that have matured or been subject to early redemption or repurchase
- marginal adjustment of portfolio composition, asset allocation, risk exposure, or investment duration.
Clarification of “fixed yield” debt instruments for purposes of the ranking
The bill clarifies the statutory subordination rules applicable to debt financial instruments issued by a securitization undertaking. It provides that non-fixed yield debt financial instruments are subordinated not only to (i) debt financial instruments with a fixed rate, but also to (ii) debt financial instruments remunerated by interest calculated on the basis of a reference rate plus a margin, all such fixed-yield debt instruments ranking pari passu among themselves.
This amendment resolves the interpretive uncertainty surrounding debt financial instruments bearing interest at a reference rate plus a margin.
By ranking such instruments pari passu with fixed-yield debt financial instruments, both being instruments whose remuneration is determined or determinable independently of the residual performance of the securitization undertaking’s assets, the bill confirms that they rank ahead of non-fixed yield debt instruments.
Significance for market participants
Taken together, the proposed amendments represent a further step in the modernization of Luxembourg’s securitization framework. They seek both to broaden the structuring options available to market participants and to resolve a number of interpretive uncertainties that have emerged in practice, particularly following the 2022 reform. In doing so, the bill reinforces the adaptability of the Luxembourg regime while preserving its core principles of investor protection, asset segregation and contractual flexibility.
From a transactional perspective, the bill should facilitate the use of Luxembourg securitization undertakings in a broader range of structures, including transactions relying on non-traditional financing techniques and more complex multi-layered platforms. The express recognition of cross-compartment investments should facilitate the structuring of more sophisticated multi-layer transactions in Luxembourg, while providing greater legal certainty for market participants using compartment-based platforms.
Likewise, the clarification of the security and guarantee regime should provide greater certainty for transactions involving multiple financing levels, cross-collateral arrangements and different categories of creditors or service providers.
The bill also strengthens legal certainty in several areas of recurring practical importance. The codification of a list of operations excluded from active management should help reduce execution risk for managed and static structures alike. The clarification of the ranking of fixed-yield debt financial instruments, including instruments bearing interest at a reference rate plus a margin, resolves a point of uncertainty in ranking analysis. Finally, the express confirmation of asset segregation in the event of the insolvency of a management company further enhances the robustness of the Luxembourg securitization framework.
Overall, the reform should consolidate Luxembourg’s position as a flexible, sophisticated and internationally competitive securitization jurisdiction.
