LUXEMBOURG Trends and Developments Contributed by: Arnaud Arrecgros, Yann Hilpert, David De Pasquale, Beatriz Garcia and Antoine Becker, Maples and Calder
asymmetric jurisdiction clauses. Nevertheless, full legal certainty in relation to enforcement – particularly where the underlying clause may not fully conform with Lastre – remains to be established. The Early Days of Capital Call Securitisation This year has seen the first steps towards the imple- mentation of capital call securitisations through Lux- embourg. Such securitisations can be structured either at the level of the borrower, where the fund’s exposure to investors’ unfunded commitments is securitised, or at the level of the senior creditor or lender, where the creditor’s participation in the facility itself is securitised. Such techniques may offer a variety of advantages to all participants in the transaction. In a post-Basel III regulatory environment, such operations may help the senior creditor to manage its balance sheet (by reducing the weight of the subscription facilities), in particular where the transaction would be imple- mented through the true sale of a loan portfolio to a bankruptcy-remote securitisation vehicle. They also open the fund financing market to new categories of investors, many of whom are likely to be attracted to pools of assets perceived as relatively robust and low risk. The injection of capital from such players – such as insurers – has long been anticipated as a means of alleviating liquidity pressures. Furthermore, the instruments issued by the securitisation vehicle, which track revenues generated by the underlying assets, may be listed and rated, creating favourable market conditions and opportunities for sponsors to achieve improved pricing.
To the extent the transaction falls within the scope of the EU and UK securitisation regulations (ie, a transac- tion where “the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics: (i”) payments in the transac- tion or scheme are dependent upon the performance of the exposure or of the pool of exposures; (ii) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme; and (iii) the transaction or scheme does not create certain exposures”) given the presence of two tranches that were subordinated to each other (with the lender holding the senior tranche), the parties will need to ensure compliance with the regulatory frame- work, notably (i) the obligation to retain a minimum exposure of 5% of the material net economic inter- est in the securitisation at the level of the party des- ignated as originator; (ii) transparency requirements, notably through detailed quarterly reporting; and (iii) due diligence assessment requirements applicable to institutional investors. Although divergences exist between the approaches of the UK and Luxembourg supervisory authorities – particularly in relation to the interpretation of “tranch- ing” – experience suggests that where an authority has decided a transaction does not fall within the regulatory framework and therefore does not trigger supervisory oversight, voluntary compliance with the framework by the parties has not presented practical difficulties. These initial steps therefore point towards the likely emergence of broadly syndicated, publicly rated capi- tal call securitisations in Europe – developments that would be welcome in the current market environment.
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