LEGAL ALERT BANKS ISSUING MORTGAGE BONDS

Transcription

1 LEGAL ALERT BANKS ISSUING MORTGAGE BONDS LAW OF 27 JUNE 2013 ON BANKS ISSUING MORTGAGE BONDS JULY

2 I. INTRODUCTION The regulatory framework in respect of the issuing of mortgage bonds ( Mortgage Bonds ) by specialised mortgage banks ( Mortgage Banks ) was recently modified by the Law of 27 June 2013 (the Law ). The amendments introduced by the Law were inspired by the recent modifications to the German legislation in respect of Mortgage Bonds (Pfandbriefgesetz). In Luxembourg, the origins of Mortgage Bonds date back to the law of 21 November The provisions of this law, as modified, form an integral part of the law of 5 April 1993 on the financial sector, as amended (the Law on the Financial Sector ). Mortgage Banks are credit institutions that have as their main object the granting of loans secured by, among others, rights in rem in moveable or immoveable property or by charges on real or moveable property, by bonds or public entities and the issuing on that basis of debt instruments secured by those rights. Mortgage Banks also conduct other banking or financial activities, which are considered as incidental and ancillary activities to the granting of Mortgage Bonds. The Law modernizes the liquidation procedures applicable to Mortgage Banks and includes some further improvements such as the introduction of a new type of Mortgage Bond, namely the lettres de gage mutuelles. II. KEY POINTS 1. Separation of Mortgage Banks Assets The activity of a Mortgage Bank can be divided into: (i) its principal activity, the issuance of secured loans refinanced by Mortgage Bonds, and (ii) its incidental and ancillary activities, the banking and finance operations. Financial difficulties may arise from either activity. Prior to the adoption of the Law, a Mortgage Bank in financial difficulty would have been wound up or directed to suspend payments as a whole, even if the financial difficulties arose solely from the incidental and ancillary activities. In such a case, the Law now provides for an automatic division of the Mortgage Bank s estate into an insolvent and a solvent part when the Luxembourg district court rules to open a suspension of payments or winding up procedure. The insolvent part, which relates to the incidental and ancillary activities, will be wound up immediately. The solvent part, which contains the Mortgage Bonds activities, will be split into different, separated asset compartments ( compartiments patrimoniaux ) and will continue to run under the management of a special administrator ( Sachwalter ) as a Mortgage Bank with limited activity. It is henceforth also possible that the court opens a suspension of payments or winding up procedure in relation to one single asset compartment, following which the Mortgage Bank with limited activity will continue to operate with the remaining asset compartments. As a result, the payment of Mortgage Bonds of a Mortgage Bank with limited activity will not automatically fall due by the launching of suspension of payment or winding up procedures in relation to the insolvent part or a single asset compartment. In fact, it is explicitly provided that the Mortgage Bank with limited activity will keep the initial Mortgage Bank licence in order to continue its limited activity and to ensure the 2

3 administration of the different asset compartments and the execution of Mortgage Bonds payments due at the respective maturity dates. However, in case the financial difficulties originate from the principal activity and the due repayment of all Mortgage Bonds is at stake, the Mortgage Bank will be liquidated as a whole, pursuant to Luxembourg common rules as governed by part IV of the Law on the Financial Sector according to the principle that the ancillary follows the primary. 2. Appointment of an Administrator by the Luxembourg District Court Prior to the adoption of the Law, the Commission for Supervision of the Financial Sector ( CSSF ) was solely responsible for the management and the further running of the Mortgage Bank that faced insolvency issues. As mentioned above, the Law now introduces the nomination of a special administrator (the Administrator ) at the request of the CSSF. In the event of suspension of payments or winding-up proceedings, the Law provides that the Luxembourg District Court will appoint one or more Administrators who will be in charge of the management of the asset compartments and the realization of the Mortgage Bonds when they reach maturity for as long as the rehabilitation and liquidation procedures of the Mortgage Bank with limited activity is ongoing. The court ruling can also provide a list of functions and resources, which are necessary to ensure the good operation of the Mortgage Bank with limited activity and to which the Administrator may resort to. It needs to be noted that the Administrator will not act as a liquidator and must not be confused with the judicial administrator, who is appointed by the Luxembourg District court in a suspension of payments proceeding pursuant to part IV of the Law on the Financial Sector and who is in charge of the insolvent part of a Mortgage Bank. Finally, if the CSSF is no longer responsible for the administration of the Mortgage Bonds, it will nonetheless continue to perform its special supervisory role regarding compliance by the Mortgage Bank with limited activity with the provisions of the Law on the Financial Sector. 3. Introduction of the lettres de gage mutuelles The Law introduces also a new category of Mortgage Bonds, the mutual Mortgage Bonds ( lettres de gage mutuelles ). By creating this new category of Mortgage Bonds, the legislator aims to extend the scope of activity of Mortgage Banks in order to make this activity more attractive for existing and potential new financial actors. The new category of mutual Mortgage Bonds includes the granting of loans to credit institutions which are established in the European Union, in the European Economic Area or in a member state of the OECD, and which participate in an institutional guarantee system ( Qualified Institutions ) and the issuing of mutual Mortgage Bonds secured by the debt entitlements resulting from these loans. Furthermore, this category allows the granting of loans which are guaranteed by either (i) bonds issued by Qualified Institutions, or (ii) by other commitments made in any form by Qualified Institutions and the issuing of mutual Mortgage Bonds secured by the debt entitlements resulting from these loans. 3

4 III. CONCLUSION With the modifications introduced by the Law, the Luxembourg regulatory framework for Mortgage Bonds now protects the mortgage bondholders more efficiently and further enhances the attractiveness of Luxembourg as a prime location for Mortgage Banks. The increased protection of bondholders will also positively affect the ratings assigned by international rating agencies to Mortgage Bonds, as these ratings are largely influenced by the quality of the mechanisms in place to protect bondholders. Thus, the modified legal framework will as well ensure that Mortgage Banks continue to obtain a rating for their Mortgage Bonds, which is at least as favorable as it is for Mortgage Bonds issued by Mortgage Banks in other EU Member States. For further information feel free to contact the following persons: Alex SCHMITT aschmitt@bonnschmitt.net Philipp MÖSSNER pmoessner@bonnschmitt.net Nathalie MANGEN nmangen@bonnschmitt.net Adrien de WATAZZI awatazzi@bonnschmitt.net *** Bonn & Schmitt July

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