The time has come for securitisation’s next day in the sun

in Advisory, 20.04.2016

Securitisation has gained a negative reputation since being perceived by many to be the cause of the 2007-09 financial crisis. However, due to improving investor sentiments and better-implemented regulation, securitisation is now re-emerging as an attractive option for both investors and firms. It offers lenders a way to meet their business goals by repackaging and spreading credit risk.

Luxembourg has shown itself to be a prime place for securitisation, with an attractive legal framework owing to the Securitisation Law of 22 March 2004 which ensures enhanced investor protection, enables the creation of compartments, and qualifies a wide range of asset classes for securitisation.

Securitisation in 127 words

Securitisation offers companies a new route to accessing diversified pools of finance. It is a way for corporates to diversify risk or raise funds by transferring illiquid assets into a newly created special purpose vehicle (SPV). These assets are packaged into various tranches and are subsequently transformed into debt securities, listed on the stock exchange. The collateral used as a basis for the securitisation transaction can range from trade receivables to student loans and mortgages. The securities can be customised in order to meet the needs of all types of investors: pension funds, insurance companies, or asset managers. In particular, securitisation is becoming increasingly attractive to financial institutions as it provides them with another avenue by which to meet the Basel III and Solvency II capital requirements.

The changing regulatory environment

Unlike during the financial crisis of 2007-09 and its aftermath, securitisation is now perceived as a safe and useful way of accessing financial markets. Policymakers and regulators have focused their attention on ensuring the financial stability of Europe, with securitisation identified as an important means of achieving this goal. In an environment of low interest rates and low inflation, securitisation provides a channel through which to pump liquidity into the real economy and ensure that in case of a future downturn, corporates are less reliant on bank finance, while banks’ lending decisions are less constrained by their capacity to hold credit risk. The European Central Bank has communicated a strong interest in ensuring that asset-backed securities are a safe and transparent asset class, and traded in well-functioning and liquid markets. At the same time, a more holistic approach is being taken towards securitisation regulation, which has had the effect of further enhancing investor confidence in this particular market segment.

Why Luxembourg?

Luxembourg has emerged as one of the preferred markets for conducting securitisation transactions, already representing 25% of all European securitisation transactions. It provides a high level of flexibility underpinned by a broad legal framework: there are no restrictions on the size of issuance and type of instruments issued. It also offers protection for investors: even in cases when an SPV goes bankrupt, certain contractual provisions protect the securitised assets from being seized. The favourable tax environment in Luxembourg, coupled with the lighter regulation and the possibility to create two-level-securitisation structures (enabling corporates to sell assets to investors in other jurisdictions) are the key and unique points that give Luxembourg an edge over other markets. Moreover, due to Luxembourg’s efficient and customer-focused listing processes, advanced trading and settlement infrastructure, and strong track record of issuing various types of securities, it has gained the reputation of a prime European financial centre in the eyes of international investors.

What’s the next move?

Considering the current market environment and the attractiveness of Luxembourg as a prime venue for securitisation transactions, the Luxembourg Stock Exchange has launched, together with KPMG Luxembourg, a new initiative outlining the benefits of listing securitised assets on the Luxembourg Stock Exchange for investors. The result of this effort is the creation of this handy guide which provides insights into the various aspects related to conducting a securitisation transaction in Luxembourg. It also contains information on the advice KPMG Luxembourg can give to corporates interested in securitisation transactions at each stage of the securitisation process: from pre-issuance analysis and planning, to data collection process planning, reviewing the issuance documentation, and executing the issuance process. We can advise on capital markets practice but also tax and legal aspects, and help ensure the optimal structuring and successful completion of the securitisation transaction.

Please contact Zia Hossen or myself for more information, or visit our webpage.

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