Security questions

  • Author : Julien Dif
  • Date : August/September
ABOUT THE AUTHOR: Julien Dif TEP is a partner at Bonnard Lawson in Geneva and Luxembourg, current Chair of STEP Suisse Romande and a member of the Council of STEP

Securitisation is a transaction by which a securitisation undertaking acquires or assumes, directly or indirectly through another vehicle, the risks relating to the claims, other assets, obligations or activity of a third party by issuing securities with a value or yield that depends on those risks.

A simple securitisation involves:

1the sale of assets by an entity (the originator) that creates (or acquires) those assets in the course of its business to a ‘bankruptcy-remote’ special purpose vehicle (SPV) in a manner that qualifies as a true sale and is intended to achieve certain results, as well as protecting the assets from claims of creditors of the originator; and2the issuance and sale, by the SPV (the issuer), in either a private placement or a public offering, of debt securities that are subsequently satisfied from the proceeds of, and secured by, the assets.

On closing the securitisation transaction, funds flow from the purchasers of the securities (the investors) to the issuer and from the issuer to the originator. All these transactions occur virtually simultaneously.

During the term of the securitisation, payments received on the assets are collected by a servicing entity, often the originator, and deposited and invested in various accounts under the direct or indirect control of a trustee and disbursed by the trustee to the investors in payment of the securities.

“Securitisation provides a vehicle for transforming illiquid financial assets”
What are the main advantages of securitisation?
1Securitisation provides a vehicle for transforming illiquid financial assets into liquid and tradable capital market instruments.2Securitisation provides originators with a more efficient and cheaper source of financing, since the securities are often able to obtain a higher rating (and thus a lower interest rate) than the long-term credit rating of the originator.3The removal of the assets from the originator’s balance sheet can help the originator improve its financial ratios.
Which legal provisions govern securitisation vehicles?

Luxembourg securitisation vehicles are governed by the law of 22 March 2004 on securitisation (the Law) and the law of 10 August 1915 on commercial companies.

What risks can be securitised?

Risks relating to the holding of assets, whether movable or immovable, tangible or intangible, as well as the risks resulting from the obligations assumed by third parties or relating to all or part of the activities of third parties, may be securitised.

In practice, securitisation transactions in Luxembourg usually involve diverse assets, such as commercial loans, mortgage loans, car-lease receivables, consumer credits, non-performing loans, commodities and operating businesses.

What are the types of Luxembourg securitisation vehicles and what forms can they take?

Luxembourg securitisation vehicles can be set up as corporate entities or as funds managed by a management company and governed by management regulations. Securitisation vehicles in the form of a fund can be set up either as co-ownership funds or as funds organised on a fiduciary basis.

A securitisation vehicle can comprise different compartments, each corresponding to a segregated part of its assets and liabilities.

Are Luxembourg securitisation vehicles subject to supervision?

As Luxembourg securitisation vehicles are usually unregulated entities, they do not have to be subject to supervision by the Luxembourg Commission for Supervision of the Financial Sector. The situation would be different if the entity was to issue securities to the public.

Bankruptcy remoteness

The ‘bankruptcy remoteness’ feature is the core aspect of a securitisation, as it allows for the segregation of the securitised assets from the insolvency risk of the securitisation vehicle or of the originator. The Law explicitly provides that non-petition clauses are valid and enforceable. Consequently, a bankruptcy petition filed by a contracting party after agreeing to such a clause will be rejected by the courts.

Taxation

Tax neutrality is a key to the success of a securitisation transaction, and the Law has achieved that neutrality.


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