A securitisation is a type of structured financing in which a pool of financial assets (such as loans or mortgages) is transferred to a special purpose vehicle (SPV) that then issues debt backed solely by the assets (collateral) transferred and payments derived from those assets.
While the benefits of securitisation may vary for different issuers and investors, the common advantage of securitisation is that it provides a lower cost of capital, enables a company to convert illiquid assets into cash and transfers the risks related to some assets to third parties.
A broad definition
The definition of securitisation is very broad and encompasses all transactions whereby an SPV acquires (true sale securitisation) or assumes (synthetic securitisation) any risk linked to an asset. This SPV is financed by the issue of shares, bonds or other securities, whose return value depends on the investment risks.
The securitisation company must adopt one of the following forms, namely:
- a company limited by shares (societe anonyme (SA));
- a limited liability company (societe a responsabilite limitee (SARL));
- a partnership limited by shares (societe en commandite par action); or
- a cooperative company organised as a company limited by shares (societe cooperative organisee comme societe anonyme). A securitisation company is not subject to a specific minimum share capital.
The minimum share capital depends upon the legal form and ranges between E12,500 (£9,000) (for an SARL) to E31,000 (£22,400) (for an SA).
Regulation in
There is no need to have the approval of a Luxembourg administrative authority, for example the Supervisory Commission of the Financial Sector (CSSF), for securitisation vehicles issuing securities in a private placement or making a single issue of securities or issue on an irregular basis. However, securitisation vehicles that issue securities on a continuous basis to the public must be authorised by the CSSF.
The following terms appear to be understood as follows: ‘continuously’ means issues more than once per calendar quarter (four times per year); and ‘to the public’ means either by public advertising or by investors who do not invest more than E125,000 (£90,300) per person.
Different asset classes
The securitisation law allows for the securitisation of ‘risks related to the ownership of all assets, whether movable, tangible or intangible, as well as risks resulting from commitments that were assumed by third parties or that are inherent to all or part of the activities undertaken by third parties’.
As a result, virtually all assets can be securitised, such as mortgages, trade receivables, commercial credits, current accounts, shares, debenture loans and buildings. Securitisation may be used in various situations. Some potential applications could be:
- Securitisation of a portfolio of securities. In order to cancel the negative consequences of the risk inherent of holding securities being accounted for on the balance sheet, a company will transfer this portfolio at current value to a securitisation vehicle. This allows companies to convert a portfolio of securities into liquid assets. The investors investing in the securitisation vehicle have the benefit of acquiring a significant interest in a portfolio of securities without having to bear the full investment of this portfolio alone.
- Securitisation as a structure for intra-group financing activities. This enables a group company to find a financing source within the securitisation vehicle. Holders of the securities of the securitisation vehicle will be paid profits owed to them on the financing activity. Unlike normal
A securitisation vehicle can thus be financed without having to maintain any minimum capital requirement. This substantially reduces the costs of financing (there is no contribution duty of 1% due as the SPV is not funded with any capital and the operating companies will have a bigger leverage, as they are able to deduct more interest than is the case when using a common Luxembourg company (soparfi)).
The tax benefits of this kind of deal structure include:
- No debt-equity ratio: as mentioned above, there is no debt-equity ratio obligation that needs to be maintained for a securitisation vehicle. This is not the case when using a common
- Withholding tax: interest and royalties paid by securitisation vehicles are not subject to any withholding tax. Furthermore, payments made to holders of shares (for instance dividends) of an SPV are not subject to any withholding tax. This is a very important advantage in comparison with a common
- Deductibility of expenses and payments to investors of the SPV: all expenses related to the management of the SPV are fully deductible and the payments made to investors of the SPV (whether in the form of interests or dividends) are further fully deductible from the taxable basis of the SPV.
- VAT exempt: the management of securitisation vehicles are exempt from VAT.
- No wealth tax: securitisation vehicles are exempt from net wealth tax. This is an important advantage as normal
- Benefit from
- Liquidation/tax exempt: the liquidation of securitisation companies is tax-exempt.
- Registration tax: any agreement executed in the context of a securitisation or any deed related thereto is exempt from the registration formality unless it relates to real estate situated in
In case of voluntary registration, such agreements and deeds are subject to a fixed registration duty of E12 (£8.70). It is important to note that for the registration of any agreement or deed relating to a securitisation, documents written in English are accepted without the need for a translation into French or German.
Olivier Sciales and Remi Chevalier are the founding partners of Chevalier & Sciales in