AGEFI Luxembourg - avril 2024

Avril 2024 19 AGEFI Luxembourg Fiscalité / Economie ByHolgervonK EUTZ ,PartnerandSecuritisa- tionLeader,MarkusZ ENZ ,Partner&Andrei R ADU , SeniorManager, PwCLuxembourg D o you still remember 2004? That was the year when Facebook and Gmail were launched. Like 2024, it also hadOlympic Games (in Athens instead of Paris) and a US Presidential Election (GeorgeW. Bush re-elected). Luxembourg re- elected Jean-Claude Juncker, ac- ting as Prime and Finance minister at the time. And at the be- ginning of that year, the Luxem- bourg parliament passed a lawon a promising financing technique called securitisation, where assets are pooled and backing securities issued to the capital market. Two decades have now passed since the Luxembourg Lawof 22March 2004 on securitisation (the “Securitisation Law”) came into effect. Enacted in 2004, the Securitisation Law aimed to boost Luxembourg’s position as a financial hub by introducing another appealing mechanism for international financial transactions. Securitisation, a form of structured fi- nancing, involves the transfer of a pool of similar assets, such as loans or receiv- ables, from an “originator” to a securi- tisation entity. This entity issues securities or other financial instruments to finance the purchase of these assets. The repayment and the interest pay- ments of the issued (asset-backed) se- curities are then secured exclusively by the transferred assets and the cash flows resulting from these assets. Let’s look back in history and discover what impacted (Luxembourg) securitisation during this period. The early years (2004 - 2010) From the launch of the Securitisation Law in 2004 until the start of the finan- cial crisis in 2008, Luxembourg’s securi- tisation market experienced significant expansion. With the implementation of the Securitisation Law in 2004, Luxem- bourg emerged as an attractive hub for global financial activities, fostering a favourable regulatory environment for securitisation transactions. During this period, there was a notable growth in the establishment of securiti- sationvehicles and the diversification of securitised asset classes. Market partici- pants capitalised on Luxembourg’s reli- able legal and tax frameworks, attracting both investors and originators seeking efficient financing solutions. In the years following the enactment of the Securitisation Law, the market was looking for further clarification of some of the concepts of the Securitisation Law. As an answer to this, the Luxem- bourg supervisor, Commission de Surveillance du Secteur Financier (CSSF) has published (and regularly updated) its “Frequently Asked Ques- tions Securitisation”. Even though for- mally only applying to supervised securitisation vehicles, this document providesmarket playerswithclarityand legal certainty, allowing them to har- monise their understandingandpractice of securitisation in Luxembourg. Nevertheless, due to the securitisationof “bad” assets, to which the return of the issued securities is linked, and the mis- use and lack of transparency of some structuring techniques in the run-up to the 2008 so called “sub-prime”-crisis in the USA, the reputation of “securitisa- tion” was highly affected worldwide. Subprime loans, i.e. non-first-lien high- yield mortgage loans, were securitised, re-securitised and acquired by numer- ous investors all around the world at- tracted by the high interest rates. Ultimately, the issued securities could not be fully repaid due to the payment difficulties of the borrowers and the US real estate bubble. This had a worldwide impact on the securitisationmarket as well as the en- tire financial market. Luxembourg was not unaffected by this; however, the Luxembourg securitisationmarket showed a higher robustness and was less impacted than the US or European market. Examining the annual cre- ation of securitisation vehicles in Lux- embourg, a noticeable slowdown is evident during the financial crisis pe- riod. In 2009, only 105 vehicles were created, followed by 102 in 2010, con- trasting sharply with the figures of 176 in 2007 and 132 in 2008. At the end of 2010, 675 vehicles were active on the Luxembourg mar- ket and a steep drop like in other jurisdic- tions was avoided. This shows that the Luxembourg securi- tisation market, even though of course af- fected by the global crisis, was more re- silient since overall hosting less risky asset classes (like trade and lease re- ceivables or struc- tured products). Surviving the crisis (2010 up to 2018) During the aftermathof thefinancial cri- sis up to 2018, Luxembourg’s securitisa- tion market demonstrated remarkable resilience and adaptability in the face of evolving global financial landscapes. Emerging from the crisis, market partic- ipants navigated through regulatory re- forms and heightened risk awareness, fostering a renewed focus on trans- parencyand riskmanagement practices. Luxembourg’s robust legal and regula- tory framework, coupled with its repu- tation as a stable financial centre, positioned the country as an attractive destination for securitisation activities. This period witnessed a gradual recov- ery in securitisation volumes and a resurgence of investor confidence, driven by innovative structuring solu- tions and a diversified range of securi- tised asset classes. Furthermore, Luxembourg’s proactive approach to aligning with international regulatory standards, combinedwith its expertise in facilitating cross-border transactions, solidified its position as a preferred jurisdiction for securitisation transactions.As themarket continued to evolve, Luxembourg remained at the forefront of innovation, leveraging its strengths to sustain growth and uphold its status as a leadingplayer in the global securitisation arena. By the end of 2018, 1,284 vehicles were active on the Luxembourg market, ex- hibiting a consistent upward trajectory throughout the period spanning from 2010 to 2018. This made Luxembourg to the leading European location hosting 29%of the European securitisationvehi- cles andwith around 6,600 series issued by these vehicles, representing 40% of the European securitisation series. Adapting to tax and regulatory evolvements (2019 – 2021) Following the financial crisis, the Euro- pean legislator brought forward initia- tives to better regulate securitisation transactions and at the same time pro- mote a European Capital Markets Union with securitisation as one means to improving the financing of the EU economy. Since 1 January 2019, Regula- tion (EU) 2017/2402 (the “EUSecuritisa- tion Regulation”) is applicable to EU securitisation transactions whose secu- rities (or other securitisation positions) are issued on or after that date. With a securitisation definition partly different from the Luxembourg one, several re- sponsibilities were implemented for originators, original lenders, sponsors, and investors to increase quality and transparency of the transactions. Also in2019, Luxembourg implemented the first Anti-Tax Avoidance Directive (ATAD 1), a significant legislative mea- sure aimed at combating tax avoidance practices within the European Union based on recommendations of the OECD. ATAD 1 introduced several re- quirements to enhance tax transparency and fairness across member states. One key requirement is the interest limitation rule,whichaims to restrict thededuction of borrowing costs (approximately inter- est expenses) that exceed 30% of a com- pany’s earnings before interest, tax, depreciation,andamortization(EBITDA). This rule affected some securitisation companies even if securitisation compa- nies, especiallyorphanstructures, arenot used for tax avoidance purposes. The implementation ofATAD 1 and the uncertainty about certain interpretations presented an important challenge to Luxembourg’s securitisation market, as some securitisation companies could eventually face the prospect of unex- pectedlyhigh tax liabilities thatwere not accounted for in their initial structures. As a consequence, themarketwitnessed a downturn, marking the first instance where the number of active securitisa- tion vehicles declined slightly from one year to the next, with 1,272 active vehi- cles end of 2019. At that time, Luxembourg was still leading the European securitisation market with 29%of the European secu- ritisation vehicles and 41% of the series issued. This changed end of 2021, when Luxembourg lost its leading position to Ireland and hosted 29% of the Euro- pean securitisation vehicles (Ireland: 32%) issuing 32% of the European se- ries (Ireland: 45%). Despite this challenge, the securitisation market in Luxembourg has again demonstratedresilience andadaptability in the face of evolving regulatory land- scapes andmarket dynamics. Besides the use of the flexibility of the so-calledLux- embourg toolbox (e.g. increased use of securitisation funds in addition to secu- ritisation companies or fiduciary struc- tures (both being tax transparent)), the jurisdiction embarkedon a pathof regu- latory modernisation to address these obstacles and enhance the competitive- ness of its securitisation framework. Since 2019, the market is also speaking withone voice, theLuxembourgCapital Markets Association (LuxCMA). Lux- CMA’s objective is topromote the capital markets industry (incl. securitisation) and Luxembourg. Continuing the growth path (2022 – today) The modernisation was materialised with the enaction of the amended Secu- ritisation Law inMarch 2022. Themod- ernised Securitisation Law built upon the success of the former Securitisation Lawand continued to incorporate legal certainty and flexibility. As such, the modernised Securitisation Lawwas not a revolution of the understanding of Luxembourg securitisation vehicles but rather an evolution towards changed demands in the use of such vehicles and increased flexibility when compared to other jurisdictions. The two main changes were the possi- bilityof the issuance of all types of finan- cial instruments and no longer only securities and the activemanagement of debt portfolios. Beside this and some other items, new legal forms of securiti- sation vehicles, like partnerships, were introduced, and a legal subordination for issued financial debt instruments was defined. Even if the effect of the modernised Se- curitisation Law was not the one ex- pected, with the Collateral Loan Obligation structures not (yet) being that present on the Luxembourg market after the enactionof themodernised law, the Luxembourg securitisation market continued its steady growth, reaching a total of 1,492 active vehicles at the endof 2023 and still representing 29% of the European securitisation vehicles. Looking at the future – challenges and opportunities Lookingahead, the securitisationmarket in Luxembourg faces challenges with navigating through evolving regulatory landscapes, particularly tax initiatives likeATAD, while also facing some oper- ational challenges, e.g. in the process of opening bank accounts. However, amongst these challenges, opportunities arise, including the potential for expan- sion into green financing to meet the growing demand for sustainable invest- ment options. Additionally, embracing cryptocurrencies and blockchain tech- nology presents avenues for innovation within securitisation structures, offering enhanced efficiency and the creation of novel financial products. We arevery confident, that securitisation in Luxembourgwill continue to steadily reinvent itself basedon its foundations of flexibility and legal certainty, as it did in the past. With the dynamics and com- mitment, we see in the market, and a newLuxembourg legislator providing a supportive environment, securitisation inLuxembourgwill have a bright future for thenext 20years to come andsupport the European Capital Markets Union. 20 Years of the Luxembourg Securitisation Law Source:PwCAnalysisbasedonLuxembourgtraderegister,ECBstatisticsandCSSFfigure DASHBOARD ȱȱ AGEFI ȱ Lux e mbou r g ȱ 2 9 Ȭ m ar Ȭ 2 4 ȱ 2 9 Ȭ D e c Ȭ 2023 DIFF ȱ % ȱ ȱ ȱȱ ȱ ȱ ȱ ȱ ȱ ȱȱ D o w ȱ 30 ȱ (DJI) ȱ 38 . 150 , 30 ȱ 37 . 689 , 54 ȱ 1 , 22% ȱ ȱ ȱ S& P ȱ 500 ȱ (GS P C) ȱ 5 . 254 , 35 ȱ 4 . 769 , 83 ȱ 10 , 16% ȱ ȱ ȱ E uro ȱ S to xx ȱ 50 ȱ 5 . 038 , 42 ȱ 4 . 521 , 65 ȱ 11 , 43% ȱ ȱ ȱ DAX ȱ (GDAXI) ȱ 18 . 492 , 49 ȱ 16 . 751 , 64 ȱ 10 , 39% ȱ ȱ ȱ CAC ȱ 40 ȱ ( F CHI) ȱ 8 . 205 , 81 ȱ 7 . 543 , 18 ȱ 8 , 78% ȱ ȱ ȱ F TSE ȱ 100 ȱ ( F TSE) ȱ 7 . 952 , 60 ȱ 7 . 733 , 20 ȱ 2 , 84% ȱ ȱ ȱ L u x ȱ G eneral ȱ I n d e x ȱ 793 , 93 ȱ 887 , 32 ȱ Ȭ 10 , 52% ȱ ȱ ȱ N i kk ei ȱ 225 ȱ (N 225 ) ȱ 40 . 369 , 44 ȱ 33 . 464 , 17 ȱ 20 , 63% ȱ ȱ ȱ Sh an gh ai ȱ (SHCOM P ) ȱ 3 . 041 , 17 ȱ 2 . 974 , 94 ȱ 2 , 23% ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ US ȱ Fe d ȱ Fun d s ȱ R ate ȱȱ 5 , 33% ȱ 5 , 33% ȱ 0 , 00% ȱ ȱ ȱ 3 ȱ M ont h ȱ US ȱ T reasury ȱ R ate ȱ 5 , 46% ȱ 5 , 40% ȱ 0 , 06% ȱ ȱ ȱ 5 ȱ Y ear ȱ US ȱ T reasury ȱ R ate ȱ 4 , 21% ȱ 3 , 84% ȱ 0 , 37% ȱ ȱ ȱ E uropean ȱ C entral ȱ B an k ȱ (ECB) ȱ R e f inan c in g ȱ R ate ȱ 4 , 50% ȱ 4 , 50% ȱ 0 , 00% ȱ ȱ ȱ 5 Ȭ Y ear ȱ E uro z one ȱ C entral ȱ G overn m ent ȱ B on d ȱ 2 , 70% ȱ 2 , 36% ȱ 0 , 34% ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ OECD ȱ G e n era l ȱ Gov er n e m e nt ȱ D e bt/GDP ȱ 2022 ȱ 2020 ȱ ȱ ȱ ȱ J apan ȱ 254% ȱ ȱ ȱ ȱ G ree c e ȱ 193% ȱ ȱ ȱ ȱ I taly ȱ 148% ȱ ȱ ȱ ȱ USA ȱ 144% ȱ ȱ ȱ ȱ OECD ȱ (T otal ȱ 2021 ) ȱ 121% ȱ ȱ ȱ ȱ B ra z il ȱ 117% ȱ ȱ ȱ ȱ Fran c e ȱ 117% ȱ ȱ ȱ ȱ S pain ȱ 116% ȱ ȱ ȱ ȱ C ana d a ȱ 113% ȱ ȱ ȱ ȱ UK ȱ 104% ȱ ȱ ȱ ȱ OECD ȱ (A vera g e ȱ 2021 ) ȱ 89% ȱ ȱ ȱ ȱ I srael ȱ 83% ȱ ȱ ȱ ȱ H un g ary ȱȱ 77% ȱ ȱ ȱ ȱ S out h ȱ Af ri c a ȱ 75% ȱ ȱ ȱ ȱ A ustralia ȱ 71% ȱ ȱ ȱ ȱ G er m any ȱ 65% ȱ ȱ ȱ ȱ Polan d ȱ 59% ȱ ȱ ȱ ȱ K orea ȱ 58% ȱ ȱ ȱ ȱ N et h erlan d s ȱ 54% ȱ ȱ ȱ ȱ Sw e d en ȱ 53% ȱ ȱ ȱ ȱ I relan d ȱ 46% ȱ ȱ ȱ ȱ T ur k iye ȱ 44% ȱ ȱ ȱ ȱ Sw it z erlan d ȱ 38% ȱ ȱ ȱ ȱ D en m ar k ȱ 35% ȱ ȱ ȱ ȱ L u x e mb our g ȱȱ 29% ȱ ȱ ȱ ȱ J apan ȱ 254% ȱ ȱ ȱ ȱ G ree c e ȱ 193% ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ 2 9 Ȭ m ar Ȭ 2 4 ȱ 2 9 Ȭ D e c Ȭ 2023 ȱ DIFF ȱ % ȱ ȱ ȱ B arrel ȱ (W est ȱ T e x as ȱ I nter m e d iate ) ȱ 0 , 4850 ȱ 0 , 4084 ȱ 18 , 76% ȱ € ȱ W est ȱ T e x as ȱ I nter m e d iate ȱ ( pri x ȱ en ȱ euro ȱ par ȱ litre ) ȱ N atural ȱ g as : ȱ 1 ȱ m 3 = ȱ 0 , 0604 ȱ 0 , 0805 ȱ Ȭ 25 , 00% ȱ € ȱ N atural ȱ G as , ȱ H enry ȱ H u b Ȭ I ȱ ( pri x ȱ en ȱ euro ȱ par ȱ m 3 ) ȱ N atural ȱ g as : ȱ 1 MWh= ȱ 5 , 8217 ȱ 7 , 7620 ȱ Ȭ 25 , 00% ȱ € ȱ N atural ȱ G as , ȱ H enry ȱ H u b Ȭ I ȱ ( pri x ȱ en ȱ euro ȱ par ȱ MWh) ȱ N atural ȱ g as : ȱ 1 ȱ MMb tu = ȱ 1 , 8400 ȱ 2 , 5100 ȱ Ȭ 26 , 69% ȱ $ ȱ N atural ȱ G as , ȱ H enry ȱ H u b Ȭ I ȱ ( pri x ȱ en ȱ $ ȱ par ȱ MMb tu ) ȱ ȱ ȱ ȱ ȱ ȱ ȱ G ol d: ȱ 1 ȱ Kg= ȱ 66 . 595 , 29 ȱ 60 . 094 , 23 ȱ 10 , 82% ȱ € ȱ ȱ G ol d: ȱ 1 ȱ o z= ȱ 2 . 234 , 36 ȱ 2 . 062 , 90 ȱ 8 , 31% ȱ $ ȱ ȱ S ilver : ȱ 1 ȱ Kg= ȱ 744 , 23 ȱ 691 , 28 ȱ 7 , 66% ȱ € ȱ ȱ S ilver : ȱ 1 ȱ o z= ȱ 24 , 97 ȱ 23 , 73 ȱ 5 , 23% ȱ $ ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ ȱ Th is ȱ d as hb oar d, ȱ e xc lusive ȱ to ȱ AGE F I ȱ L u x e mb our g, ȱ allo w s ȱ t h e ȱ rea d er : ȱ 1 ° ȱ to ȱ see ȱ t h e ȱ returns ȱ o f ȱ t h e ȱ m ain ȱ assets ȱ an d ȱ f inan c ial ȱ in d i c es ȱ f or ȱ t h e ȱ c urrent ȱ year ȱ 2 ° ȱ to ȱ see ȱ on ȱ one ȱ pa g e ȱ t h e ȱ m ain ȱ sto ck ȱ m ar k et ȱ in d i c es ȱ an d ȱ interest ȱ rates ȱ 3 ° ȱ to ȱ k no w ȱ t h e ȱ pro d u c tion ȱ c ost ȱ o f ȱ several ȱ ener g y ȱ pro d u c ts ȱ in ȱ euros , ȱ to ȱ c o m pare ȱ w it h ȱ t h e ȱ retail ȱ pri c e ȱ 4 ° ȱ to ȱ k no w ȱ t h e ȱ pri c e ȱ o f ȱ g ol d ȱ an d ȱ silver ȱ in ȱ k ilos ȱ an d ȱ in ȱ euros . ȱ 5 ° ȱ to ȱ i mm e d iately ȱ see ȱ t h e ȱ pu b li c ȱ d ate /GD P ȱ f or ȱ several ȱ si g ni f i c ant ȱ c ountries ȱ ȱ ȱ