Luxembourg is ranked third in the eurozone for securitisation business, and this is set for a boost when a long-awaited reform of the law is passed, hopefully in the first half of this year. Although largely technical in nature, industry players are hopeful that these reforms could see growth in this relatively small but significant niche.
Luxembourg-based “financial vehicle corporations” (the technical term for the vehicles used to facilitate securitisation transactions), held €356bn assets in September 2021, according to the European Central Bank. This represented 17% of the eurozone market, which makes Luxembourg the third largest European hub for this activity behind Ireland (26%) and Italy (22%).
Significant niche
While this figure is a fraction of the €5.7trn assets held by Luxembourg investment funds, securitisation remains an interesting niche for the financial sector, adding to the expertise of the often-cited “Luxembourg financial sector ecosystem”. Moreover, there are a significant number of vehicles: 1,412 with around 9,000 transactions/compartments, according to the CSSF. Almost all of these were in corporate form, with just one in twenty being a securitisation fund, said a recent report by PwC.
Securitisation is the process of taking one or a group of assets and using financial engineering to transform this into a security. Loan and debt securitisation accounted for most of total assets in Luxembourg, at 39% and 35% respectively according to the CSSF. However, with 16% of the total, the securitisation of equity instruments and investment funds is also an important Luxembourg speciality.
The main asset classes for these vehicles in 2021 were loans (performing and non-performing), investment funds/bonds, trade receivables, lease receivables and structured products, said the PwC survey. The main investors were banks, investment funds, insurance/pension companies, and wealthy individuals. “Taxation is usually not the main driver to set up a securitisation vehicle in Luxembourg, but rather an element checked to ensure tax treatment is not disadvantageous,” said the PwC report.
Reform of restrictions
However, the sector has been held back by regulatory restrictions imposed by the 2004 law. According to the PwC survey, this environment “limits the possibility of loan financing and allows it only under certain conditions.” This would be changed by draft law 7825, on which the legislative oversight body the Council of State issued its opinion on 17th December They requested clarification of the language of the text, and it is hoped that these questions can be resolved relatively quickly to allow the bill to become law in the first half of this year.
There are about half a dozen key reforms planned. Refinancing of a transaction would henceforth be possible via any financial instrument (such as promissory notes or loans) not just securities. As well as adding flexibility this should cut cost. Practitioners would have a greater choice of legal forms used elsewhere in the financial sector. The “société en nom collectif ”, “société en commandite simple”, “société en commandite spéciale” and “société par actions simplifiée” would all be acceptable. Active management for experienced investors would also be permitted for risks linked to bonds, loans or other debt instruments. A range of other similar technical changes are foreseen to make life easier for securitisation specialists and their clients.
Growth expected
Growth in total assets of financial vehicle corporations was 5% in the first nine months of last year, but this followed 12% and 11% in the previous years. There is expectation for growth, with three-quarters of those responding to the PwC survey forecasting growth in the coming years, with just 3% fearing contraction. “The positive expectations are mainly due to an expected growth of securitisation in Europe overall, as well as the modernisation of the law,” the PwC report concluded.