Securitisation in Luxembourg // June 2017 www.cs-avocats.lu
An unremitting devotion to the goals you want to achieve LEGAL 500 2017 Investment funds The responsive and hardworking team at Chevalier & Sciales provides a value-for-money service on the establishment and restructuring of UCITS and SIFs. Name partner Olivier Sciales recently assisted a promoter on the establishment of an equity fund specialising in indirect investments into Euro-denominated mortgage loans in Spain. Banking, finance and capital markets While it is best known for investment fund matters, Chevalier & Sciales s broader expertise also covers debt capital markets and securitisation transactions. Rémi Chevalier is the primary contact. LEADERS LEAGUE Excellent 2016 Ranking of the Top Law Firms in Luxembourg Investment Management - Luxembourg Highly recommended 2016 Ranking of the Top Law Firms in Luxembourg Asset Management - Luxembourg Recommended 2014 Ranking of the Top Law Firms in Luxembourg Banking and Finance - Luxembourg 2015 Ranking of the Top Law Firms in Luxembourg Commercial Litigation - Luxembourg 2016 Ranking of the Top Law Firms in Luxembourg Banking & Finance - Luxembourg 2016 Ranking of the Top Law Firms in Luxembourg Private Equity - Luxembourg 2016 Ranking of the Top Law Firms in Luxembourg Commercial Litigation - Luxembourg www.cs-avocats.lu
Securitisation in Luxembourg // 01 KEY FEATURES page 4 02 SECURITISATION VEHICLES AS ALTERNATIVE INVESTMENT FUNDS ( AIF ) page 6 03 REQUIRED DOCUMENTS FOR SUPERVISED SECURITISATION VEHICLES page 6 04 TAX BENEFITS AND OTHER ADVANTAGES page 7 05 CONCLUSION page 8
The Luxembourg law of 22 March 2004 on securitisation (the Securitisation Law ) has laid the foundations for the legal, regulatory and tax framework for Luxembourg securitisation vehicles. The main features and advantages of the Securitisation Law are discussed hereunder. A securitisation is a type of structured financing whereby a pool of financial assets (such as loans, mortgages, etc.) is transferred to an entity that subsequently issues debt securities backed solely by the transferred assets (collateral) and payments derived from those assets. While the benefits of securitisation may vary for different issuers and investors, the common advantage of securitisation is that it provides a lower cost of capital, it enables a company to convert illiquid assets into cash and it also transfer the risks related to some assets to third parties. key features (a) Definition The definition of securitisation is very broad and encompasses all transactions whereby an undertaking acquires (true sale securitisation) or assumes (synthetic securitisation) any risk linked to an asset. This undertaking is financed by the issue of shares, bonds or other securities, whose return value depends on the investment risks. (b) Legal forms share capital The Securitisation Law distinguishes between securitisation vehicles that have either been set up under the form of a company (securitisation company) or under the form of a fund (securitisation fund) without legal personality run by a management company. The securitisation company must adopt one of the following forms, namely (i) a company limited by shares (société anonyme or S.A.), (ii) a limited liability company (société à responsabilité limitée or S.à. r.l.), (iii) a partnership limited by shares (société en commandite par actions) or (iv) a cooperative company organized as a company limited by shares (société cooperative organisée comme société anonyme). A securitisation company is not subject to a specific minimum share capital. The minimum share capital depends upon the legal form and it ranges between 12,000 euro (for a S.à r.l.) to 30,000 euro (for a S.A. and S.C.A.). (c) Supervision As a general rule, securitization vehicles do not require the approval of the Luxembourg regulator, the Supervisory Commission of the Financial Sector ( CSSF ), if such vehicles issue securities in a private placement or make a single issue of securities or issue on an irregular basis, less than 3 times per year. On the other hand, securitisation vehicles which issue securities on a continuous basis to the public must be authorized by the CSSF. The following terms should be understood as follows: continuously means more than three (3) issues per year to the public. The number of 4
issues to consider is determined by the total number of issues of all compartments of the securitisation undertaking. to the public : concerning the issuance of securities to the public, the CSSF provided the following criteria: issues to professional clients within the meaning of Annex II to Directive 2004/39/ EC (MIFID) are not issues to the public; issues having denominations equal to or above EUR125,000 are assumed not to be placed with the public; the listing of an issue on a regulated or alternative market does not ipso facto entail that the issue is deemed to be placed with the public; issues distributed as private placements, irrespective of their denomination, are not considered as issues to the public. The CSSF assesses whether the issue is to be considered as a private placement on a case-by-case basis according to the communication means and the technique used to distribute the securities. (d) Asset classes The Securitisation Law allows for the securitisation of risks related to the ownership of all assets, whether movable, tangible or intangible, as well as risks resulting from commitments that were assumed by third parties or that are inherent to all or part of the activities undertaken by third parties. As a result, virtually all assets can be securitised such as: mortgages, trade receivables, commercial credits, current accounts, shares, debenture loans, buildings, etc. Securitisation may be used in various situations and it may be performed either as (i) a true sale whereby the securitisation undertaking becomes the legal owner of the claims, (ii) a synthetic securitisation where only the risks linked to the debt portfolio are transferred to the securitization undertaking, or as (iii) a whole or partial business securitisation. Some potential applications could be: Securitisation of a portfolio of securities In order to mitigate the negative consequences of the risk inherent of holding securities being accounted for on the balance sheet, a company may transfer this portfolio at current value to a securitisation vehicle. This allows companies to convert a portfolio of securities into liquid assets. The investors investing in the securitisation vehicle have the benefit of acquiring a significant interest in a portfolio of securities without having to bear the full investment of this portfolio alone. Securitisation as a structure for intra group financing activities It enables a group company to find a financing source within the securitisation vehicle. Holders of the securities of the securitisation vehicle will be paid profits owed to them on the financing activity. Unlike normal Luxembourg companies, there is no debt equity ratio that needs to be maintained on a securitisation vehicle. A securitisation vehicle can thus be financed 5
without having to maintain any minimum capital requirement. This substantially reduces the costs of financing and the operating companies appoint an alternative investment fund manager that shall be either registered or authorized subject to the value of the portfolio it manages. will have a bigger leverage, as they are able to deduct more interests than is the case when using a common Luxembourg company (soparfi)). securitisation vehicles as alternative investment funds ( aif ) A securitisation vehicle may qualify as an AIF within the meaning of the law of 12 July 2013 on alternative investment funds managers ( AIFM Law ) under certain conditions. For Certain unregulated securitisation vehicles may qualify as shadow banking entities and therefore provisions related to shadow banking should be observed, in particular exposure of investors to shadow banking entities. For the avoidance of doubt, a securitisation vehicle shall not qualify as an AIF if: such vehicle meets the definition of securitization special purpose vehicle or securitization SPV under the AIFM Law; it issues collateralised debt obligations ; it only issues debt instruments; or such entity is not managed according to an investment policy within the meaning of the AIFM Law. example, undertakings having as a core business the securitisation of loans that they grant themselves, acting in their capacity of first lender would fall under the definition of AIF. Similarly, securitisation vehicles that issue structured products offering a synthetic exposure to assets other than loans (noncredit related assets) and whereby the credit risk transfer is only ancillary would also be considered as an AIF. required documents for supervised securitisation vehicles Should a securitization vehicle qualify as an AIF, additional requirements would need to be fulfilled that are more or less numerous depending on its supervision status. At a minimum, the securitisation AIF would need to The securitisation undertaking supervised by the CSSF is expected to provide copies of the following documents to the CSSF, as soon as such documents are finalised: 6
the final issue documents related to any issue of securities; the financial reports prepared by the undertaking and rating agencies, if applicable; the annual reports and the documents issued by the auditor; information regarding any change of service provider and significant provisions in a contract, and information on any amendment regarding fees and commissions. vehicle. This is not the case when using a common Luxembourg company (soparfi), where there is a 85/15 debt equity ratio. Nevertheless, although borrowing is permitted, it should be noted that borrowing can only be used on an ancillary basis and/or where the credit line would be temporarily necessary in view of the type of securitization. Withholding tax: Interests paid by securitisation vehicles are not subject to any withholding tax (except for the application of EU Law). Furthermore payments made to Additionally, the authorised securitisation vehicle should provide following documents to the CSSF: holders of shares (for instance dividends) of a securitisation undertaking are not subject to any withholding tax. This is a major advantage as compared to an ordinary Luxembourg company a listing of the new issue of securities, other outstanding issues and issues that matured over the period under review, on a semi-annual basis within 30 days; a summary of the financial situation of the securitisation, on a semi-annual basis within 30 days; a draft balance sheet and profit and loss account, within 30 days from the financial year closing date; and any other information deemed necessary by the CSSF. tax benefits and other advantages (soparfi) which is subject to a 15% withholding tax on dividends. Deductibility of expenses and payments to investors of the Luxembourg securitisation undertaking: All expenses related to the management of the securitisation undertaking are fully deductible and the payments made to investors of the securitization company (whether in the form of interests or dividends) are further fully deductible from the taxable basis of the securitisation undertaking. Therefore Luxembourg securitisation companies should not generate significant taxable profits and should therefore to, a large extent, be tax neutral. VAT exempt: The management of securitisation vehicles are exempt from VAT. No Luxembourg wealth tax: Securitisation No debt equity ratio: As above mentioned, there is no debt-to-equity ratio obligation that needs to be maintained for a securitisation vehicles are exempt from net wealth tax. This is an important advantage as normal Luxembourg companies (soparfi) are subject to a wealth tax 7
of 0.5% on the net assets of the company. Benefit from Luxembourg s double tax treaty network: As securitisation companies are fully taxable companies, they can in principle benefit from Luxembourg s double tax treaty network. Liquidation / tax exempt: The liquidation of securitisation companies is tax exempt. Registration tax: Any agreement executed in the context of a securitisation or any deed related thereto is exempt from the registration formality unless it relates to real estate situated in Luxembourg, aircraft or vessels recorded in a Luxembourg public register. In case of voluntary registration, such agreements and deeds are subject to a fixed registration duty of 12 Euro. It is important to note that for the registration of any agreement or deed relating to a securitisation, documents written in English are accepted without the need for a translation into French or German. Listing on the Luxembourg Stock Exchange: The securities issued by a Luxembourg securitisation vehicle may be listed on the Luxembourg Stock Exchange (either on the Regulated Market as on the Euro MTF), however such listing does not necessarily entail the issuance to be qualified as to the public. attributable to such compartment. All the rights of investors and creditors in relation to each compartment are therefore limited to the assets of the compartment. Each compartment will be deemed to be a separate entity for the investors and creditors of the relevant compartment and unlike investment funds, the liquidation of the last compartment of the securitization vehicle does not entail the liquidation of the company structure. conclusion The Securitisation Law allows Luxembourg to market itself as a key jurisdiction for securitisation transactions. Luxembourg legislators have created a tailored framework for securitisation transactions by establishing a well balanced compromise between flexibility of the securitisation vehicle on the one hand and investor protection on the other hand whilst at the same time providing a tax neutral environment. 8 Possibility to have segregated compartments: The Luxembourg securitisation company can establish segregated compartments and maintain at the same time its status of a single legal entity. Each pool of assets may be invested for the exclusive benefit of the relevant shareholders of the compartment and each compartment shall be responsible only for the liabilities which are
how can we assist you? Our finance and capital markets team: supports you in finding the suitable securitisation vehicle to meet your requirements and your goals from a marketing, regulatory, legal and tax perspective; For further information please contact: introduces you to the suitable service providers to meet your requirements (i.e. administrative agent / accounting firm and auditor); provides assistance with the establishment of the securitisation vehicle (i.e. drafting of the PPM, subscription agreements and assistance with the incorporation of the securitisation vehicle); provides corporate support services throughout the lifetime of your securitisation vehicle (i.e. amendment of PPM, restructuring, launching or closing compartments, etc.); provides assistance with the listing of the equity or debt securities issued by the securitisation vehicle on the Luxembourg Stock Exchange s regulated or EURO MTF markets; provides advice on AIFMD related issues; provides advice to sponsors on local private placement rules for marketing their securitisation vehicle in Luxembourg; keeps you up to date on new legal and regulatory developments. rémi chevalier Finance & Capital Markets Partner Tel: +352 26 25 90 30 remichevalier@cs-avocats.lu olivier sciales Investment Management Partner Tel: +352 26 25 90 30 oliviersciales@cs-avocats.lu 9
Chevalier & Sciales is a Luxembourg law firm established in 2005 and specialising in the investment management, banking and financial services industry. Our services cover all types of Luxembourg investment vehicles and advice and assistance for entrepreneurs, investors, financial sector professionals and fund managers. The firm s practice, though exclusively focused on Luxembourg law, is global and multidisciplinary. Chevalier & Sciales offers a comprehensive service covering all the key legal tax aspects of the investment process from devising creative and tax-efficient investment structures to their complete implementation. Our team of highly skilled lawyers, who have cross-disciplinary expertise and in-depth understanding of financial markets, is responsive to clients requests and delivers accurate and practical advice. Chevalier & Sciales is a Luxembourg law firm which is recommended and listed in the area of investment funds and banking, finance and capital markets in the Legal 500 directory. LUXEMBOURG 51, route de Thionville L-2611 Luxembourg Grand Duchy of Luxembourg Tel : +352 26 25 90 30 Fax : +352 26 25 83 88 www.cs-avocats.lu // Disclaimer The information contained herein is of general nature and is not intended to address the circumstances of any particular individual or entity. Although we have taken care when compiling this document, there can be no guarantee that such information is accurate at the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Chevalier & Sciales does not accept any responsibility whatsoever for any consequences arising from the information in this publication being used.