The amendments to the 2004 securitisation law, passed by parliament on 9 February, allow the active management of securitisation vehicles in Luxembourg for risks linked to debt instruments – provided that the securitised assets are issued under private placement and consist of repackaged debt.
“This is a very good opportunity for securitisation in Luxembourg as now we can offer the full suite of securitisation options,” said Matthieu Taillandier, partner in the capital markets practice of law firm Arendt & Medernach.
“The amendments provide regulatory certainty needed to increase the volume of active-managed CLOs in Luxembourg,” added Holger von Keutz, partner and securitisation leader at global consultancy PWC Luxembourg.
Sources expect a diversification into CLO management in Luxembourg to not only to increase the country’s investor toolkit by attracting active-managed CLOs taking Luxembourg as a jurisdiction of choice, but also to create opportunities for management companies providing third-party fund services.
For private equity companies located in Luxembourg there are additional opportunities. Many private equity houses have active debt funds in Luxembourg, but until now have had to base their CLO activity elsewhere. With the law now in place, it may be possible to consolidate their activities by relocating the portfolio management of CLOs currently based abroad.
"Now that the law is passed it‘s possible to look more comprehensively at the potential merits of a proposed Luxembourg structure,” Quentin Lévêque, GP manager in funds and operations at private equity house Bridgepoint, said.
There is more than €3bn in PE and venture capital funds domiciled in Luxembourg, according to market data analyst Prequin, and, according to Luxembourg Private Equity Association, more than 1,400 jobs.
Debt refinancing
As well as enhancing the environment for CLOs, the changes in the law also raise unsung opportunities for refinancing in Luxembourg, noted PWC’s von Keutz. Under the terms of the new law, financial instruments such as loans can be used for refinancings whereas the law formerly required a security issuance.
“The replacement of refinancing by financial instruments instead of securities gives far more flexibility to the [Luxembourg] market, plus savings in transaction costs and time,” said von Keutz.
Banks in particular stand to benefit from a more flexible financing regime to participate to securitisation transactions, pointed out Taillandier. “It will now be possible for banks to participate in securitisations by making direct loans. This means that they will be in a position to intervene as investors in a transaction as well as lender.”
Increasing the number of refinancing tools available holds benefits for the financing of the real economy, particularly trade receivables financing, which is often the territory of banks. “Banks now don’t need to issue invest into a security for leasing transactions or trade receivables financing, but can simply grant a loan” added von Keutz.
Private debt
However, there are also benefits for private debt funds, whose assets under management in Luxembourg hit €181.7bn in June 2021, according to KPMG Luxembourg and the Association of the Luxembourg Fund Industry figures.
“Private debt funds in Luxembourg now include securitisation vehicles in their debt structures” said Gautier Despret, private debt committee co-chair at the LPEA. He explained that rather than using intermediary vehicles to segregate various debt tranches or to accommodate other diversification requirements, an actively-managed securitisation vehicle could now compartmentalise senior loans, unitranche and mezzanine debt. “This will save on management and administration costs and will also be more efficient for private debt managers,” he said.
“This could likely save in management/administration fees and be more efficient for private debt,” he said.
Ireland vs Luxembourg
Historically, Ireland has been the jurisdiction of choice in which to European CLO transactions. Although Luxembourg’s new CLO-friendly structure may attract some of this market, particularly those looking for a gateway to Germany, it won’t be a flood, sources warn.
"We expect that some CLO managers, representing a share of the European CLO market, will also look at Luxembourg, notably to reach out to continental investors (thinking of Germany in particular) and take advantage of these connections,” said Arnaud Arrecgros, head of Maples and Calder’s finance team in the Maples Group’s Luxembourg office.
Taillandier agrees. “[Ireland to Luxembourg] will not be a massive shift. We see the opportunity coming more from those with existing activities in Luxembourg to consolidate.” However, he notes “Luxembourg is now a possibility for those with activities in Ireland.”
Luxembourg also presents some advantages over Ireland.
“We believe that with Luxembourg’s option of reporting in LuxGAAP, compared to the much more onerous IFRS required in other jurisdictions, many clients will wish to benefit from this simpler, less timely and therefore less costly reporting model,” said Sandra Bur, head of capital markets at investment advisory Ocorian.
Ocorian estimated assets in Irish-domiciled CLOs at €170 billion as of April 2021.
Diversification
The consequence for jobs and skills in Luxembourg is significant. “Luxembourg has typically been a back-office place,” said von Keutz. “However, with a greater number of products available to financial houses like hedge funds and even to banks, there will be a greater requirement for regulation teams and supporting departments. We will see a transition from back office to middle office.”
It is an important move to diversify the tools available in the Luxembourg market.
“It will open a new market for Luxembourg,” said Arrecgros. “It will increase recognition of an internationally proven and recognised securitisation regime, bring new investors and CLO managers and open the door to innovative structures.”
Taillandier summarises. “Until now the full offer was not available in Luxembourg. This law puts us back on the map and fully on the map.”