Agefi Luxembourg - novembre 2024

Novembre 2024 13 AGEFI Luxembourg Economie E urope stands at a critical point, needing to enhance its competitiveness and attrac- tiveness amidglobal competition for investments.According to the latest EY research (1) Europe’s for- eigndirect investments declinedby 4%in 2023,marking the first an- nual downturn since 2020. Current projections fromthe International Monetary Fund (2) released inOcto- ber 2024, indicate a stagnationof Germany’s economy for 2024 – Eu- rope’s biggest economy.At the same time, growth is expected in all the otherG7 countries. In addition to the current difficult eco- nomic environment resulting fromhigh inflation, volatile energy prices, supply issues, and high interest rates, Europe, andespeciallyGermany, are expected to face a tremendous challengewith the re- quired investment needs for the green and digital transformation of the econ- omy.According to theEuropeanCentral Bank, these requirements are estimated to cost EUR 620 billion annually within the EuropeanUnion. (3) SecuritizationBackon the HighestAgenda of Policymakers There is a consensus among politicians, business organizations, and other stake- holders that transformative changes are necessary toaddress these challenges.As highlighted by recommendations from thought leaders like former ItalianPrime Minister Letta in April this year (report onthefutureoftheSingleMarket),orfor- mer ECB President Draghi in September 2024onEUcompetitiveness,theseinvest- ments can only be financed with the completion of the Capital Market Union anda revival of the securitizationmarket. As Letta stated: “ Securitization acts as a unique link between credit and capital mar- kets. In this sense, the securitization market offers significant potential. ” Compared to the US, issuances in the EU securitization market have re- mained at very low levels since the fi- nancial crisis, reflected by USD 2.5 trillion in the US vs. EUR 203 million in the EU. (4) European securitizationswere unjustly discredited, as evidenced by their consistently low default rates be- fore, during, and after the crisis. Never- theless, securitizations in Europe still appear to be stigmatized. Given the current economic challenges and the massive investment needs re- quired for the transformation, securiti- zation seems to be back on the highest agenda of policymakers. This was con- firmed by the release of the consultation paper of the European Commission for the regulation of the securitizationmar- ket (5) which is closing for feedback from market participants in December 2024. Limitations in theGerman SecuritizationRegulatory Environment As mentioned previously, securitiza- tions have been enjoying a lot of political attention over the past few months. In addition, associations and market par- ticipants have issued concrete action calls to unlock the potential of securiti- zation in Germany. Recently, the Asso- ciation of German Banks, together with True Sale International GmbH, issued a report (6) summarizing current obstacles in the securitization regulatory environ- ment to strengthen the market. Themost common issues identified at a European level, impacting the Luxem- bourg securitization market as well, pertain to: Reducing transaction costs in the mar- ket – simplifying the Securitization Regulation (SECR): Concretemeasures focus on making the process of issuing securitizations faster and easier to broaden the investor base. The report calls for enhancements and changes in the European Securitization Regulation (SECR), for example, in relation to Due Diligence and Transparency require- ments as well as changes to require- ments for simple, transparent, and standardized (STS) transactions. Appropriate adjustments to the frame- workforsecuritizationforbanksandin- surance companies: Two major reasons for the non-involvement of small and medium-sized banks are identified: high costs of implementation and dispropor- tionate capital requirements. While in re- centyears,wehaveobservedanincreased use of synthetic risk transfers for larger banks,aboostandrevitalizationofthese- curitizationmarket can only be achieved when small lenders from the partially fragmented German banking market, which includes more than 1,200 banks, aresubstantiallyinvolved.However,even forlargeinstitutions,substantialimprove- ments to regulations and cost reductions are seen to be required. This report ad- dresses these issues and considers con- crete adjustments to the Capital Require- ments Regulation (CRR), Liquidity Cov- erage Ratio (LCR), and other regulatory requirements. Insurance entities’ role: With their fundedcapital investment, insurance en- tities couldplayakey role in fostering the German economy. However, they face similar issues in the revitalization of the European securitization market. To ad- dress this, specific adjustments are high- lighted,especiallyinrelationtothecapital requirements pursuant to Solvency II, as wellastheparticipationofinsurersinSTS securitizations. In addition to the obstacles at the Euro- pean level for revitalizing the securitiza- tion market, the report from the Association of German Banks, together with True Sale International GmbH, calls for the creation of a national German se- curitizationframework.WhiletheLuxem- bourg Law of 22 March 2004 on securitization (the ‘Securitization Law’) has been in force for two decades, Ger- manystilllacksaspecificlawcoveringse- curitizationvehicles(SV)andtransactions. Luxembourg’s Proven SecuritizationLaw Generally, together with Ireland and Italy, Luxembourg remains one of the leading financial centers for securitiza- tion. Based on the European Central Bank’s Q3/2024 statistics, which can be seenas agood indicationof generalmar- ket developments during the year, 1,542 Financial Vehicle Corporations (FVC) were registered inLuxembourg (1,512on 31 December 2023), representing 30% of all FVCs across Europe. A substantial amount of the Luxembourg SVs are se- curitizing assets originated in Germany, including to a large extent trade receiv- ables and auto loans and lease receiv- ables, which are performed mainly through Asset-Backed Commercial Paper(ABCP)programsortruesalepub- lic/non-publicABS transactions. When comparing key proposals for a German securitization lawwith the cur- rentsituationinLuxembourg,theconclu- sion is clear: Specific legal formwithmulti-compart- ment feature: Currently, there is no spe- cial securitization purpose entity foreseen to be introduced to German law, and the general requirements are stipulated in theAct onLimitedLiability Companies. This law does not foresee any provisions with regards to the legal segregation of assets in compartments. When comparing to the Luxembourg SecuritizationLaw, it is clear that this has been one of the main contributors to the huge success of Luxembourg SVs over the last decades. With the possibility to create multi-compartment structures, Luxembourg stands outwitha cost- and time-efficient legislative framework. TrueSaletransactions: Giventheabsence of a dedicated German securitization framework,thisreporthighlightstheneed to include regulations for true sale trans- actions, more specifically for the SV to claim separation of the assets from the originatorincaseofinsolvency.TheSecu- ritization Law in Luxembourg already provides such clarification by stipulating that the assignment of receivables byor to an SV includes the transfer of the associ- atedguaranteesandsecurityinterests.Ad- ditionally, it ensures that theSVis entitled toclaimanycashcollectedonitsbehalfbe- fore the commencement of liquidation proceedings. Responsive to market demands: Not only does Luxembourg have a dedicated securitization law, but the Luxembourg government has also recently responded tomarket practices anddemands by clar- ifying andmodernizing the Luxembourg SecuritizationLaw.Thesechangespertain to,interalia,furtherpossibilitiestoactively manage risk portfolios and to grant secu- rity interests, offering newways of fund- ing and increasing the number of legal forms allowed for the purpose of setting upsecuritizationcompanies.Thesemeas- uresunderlinetheimportanceofthesecu- ritization market on the agenda of the Luxembourg government and highlight theveryfavorableandknowledgeableen- vironmentthatoriginators,arrangers,and investors find inLuxembourg. In addition to the various legislative as- pects required tobuildaGermansecuriti- zation framework, which – given the current political situation in Germany – does not appear to be very likely to suc- ceed in the short term, Luxembourg has anadvantageofmorethan20years,which has led to a well-developed ecosystem around securitizations, including experi- enced and well-established service providers,listingfacilities,custodians,and othermarket participants. Conclusion FromaLuxembourgperspective, the ris- ing spotlight fromEuropeanpolicymak- ers and thought leaders on theEuropean securitizationmarketisverywelcome.As highlighted, without a real revitalization of securitization, the essential invest- ments will be difficult to finance. As an example, the first ‘solar securitization’ was seen in October this year, allowing investment in nearly 8,500 loans to Ger- man homeowners for the financing of solar panels. This indicates the key role securitizationcanandwill play infinanc- ing the green transition. This transaction is enabled via a Luxembourg securitiza- tion vehicle and clearly shows that from an originator or arranger perspective, Luxembourg as a key hub for securitiza- tions cannot bemissed out. Luxembourg’swell-establishedandflexi- ble securitization framework will play a key role in financing transformation and enablinggrowth.Incomparisontothesit- uation in Germany, the strengths of the Luxembourg Securitization Law are un- deniable. However, from a European point of view, the aforementioned report highlights required changes and simplifi- cations to the SECR. Without changes to broaden the investor base, the European securitization market will not move for- ward substantially. Therefore, the current consultation on the SECR and the ex- pected changes under the newEUCom- missionshouldbecloselymonitoredbyall market participants. Papa Saliou DIOP Partner, Banking & Capital Markets, Luxembourg Securitization Leader Alexander KASTENDEUCH Partner, Banking & Capital Markets Patrick LOCH Senior Manager, Banking & Capital Markets EY Luxembourg 1)2024ForeigndirectinvestmenttrendsinEu- rope|EY-Global 2)IMFcutsforecastsforGermaneconomythis yearandnext|Reuters 3)Europe’stragedyofthehorizon:thegreentran- sitionandtheroleoftheECB 4)Reportontheinstitutionalandregulatorydif- ferencesbetweentheamericanandeuropeanse- curitizationmarkets 5)Targetedconsultationonthefunctioningofthe EUsecuritizationframework2024-European Commission 6)Report_TF_securitisation_web.pdf State of the European and German Economy Grégoire TALBOT – CEO & Co-founder chez D-Carbonize Décarbonisation de l'industrie, une simple obligation, un avantage concurrentiel, ou une véritable question de survie ? 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