Luxembourg could become the jurisdiction of choice for actively managed CLOs Romain Gamba / Maison Moderne

Luxembourg could become the jurisdiction of choice for actively managed CLOs Romain Gamba / Maison Moderne

Legislation that will make Luxembourg attractive to the billion euro European collateralised loan obligation market is due to be approved in the Luxembourg parliament in a matter of weeks, two sources with knowledge of the matter confirmed to Delano.

An amendment to Luxembourg’s 2004 Securitisation Law, lifting the constrictions of the existing so-called ‘passive management limitation’ is scheduled for the first two weeks of the parliament’s February 2022 plenary session, meaning that Luxembourg could now offer an efficient legal framework for actively managed CLOs.

“Certainty [around the law’s adoption] will help transform Luxembourg into a promising alternative jurisdiction of choice for these transactions,” said one of the sources.

Collateralised loan obligations are marketable securities often backed by corporate loans with low credit ratings, or by leveraged debt. At present, Europe’s CLO activity centres on Ireland where, according to investor services provider Ocorian, assets in Irish-domiciled CLOs hit €170 billion in April 2021.

On 22 May 2021, a draft amendment to Luxembourg’s securitisation law was lodged with the parliament. The bill proposed adding a new article that specifically permits active management of securitisation vehicles for risks linked to bonds, loans or other debt instruments, so long as these are issued under private placement. This would enable Luxembourg to attract more CDO/CLO structures which have historically been set up in other jurisdictions, a third source explained to Delano.

However CLO managers have been unwilling to relocate their activities ahead of any formal approval.

“If [it happens] in February, we expect to see CLO managers setting up in Luxembourg before the end of 2022,” said a fourth source.

“The Draft Bill and its possible effects upon the CLO market here in Lux has been the hot topic at all recent Luxembourg capital markets events,” added the third source.

New CLO issuance activity is expected to remain strong throughout the coming year, reflecting record leverage debt issuance activity in 2021, solid leverage debt issuance expectations in 2022, benign CLO arbitrage and a positive macroeconomic outlook across major European countries, according to the CLO-EMEA 2022 Outlook November 2021 report from ratings agency Moody’s Investor Services.

Updated on 19 January 2022 to correct European parliament for Luxembourg parliament and to amend the company description of Ocorian.