Luxembourg opens for CLO business after regs update

Michelle D’souza

Reporter

Upcoming changes to Luxembourg’s securitisation regulation could deliver a huge boost to its CLO market, in a move that would see the jurisdiction compete with market leader Ireland.

“The main and very successful piece of legislation — which dates back to 2004 and had not seen any major overhauls since its inception — did not unambiguously deal with the possibility of actively managing CLOs,” says David Van Gaever, counsel at Allen & Overy.

“But the Luxembourg legislator has taken the requests of the market to heart. Amendments to the Securitisation Act are expected to enter into force during February 2022.”

The amendments expressly allow the management of debt portfolios. They also enable the issue of any form of financial instrument (such as loans) from vehicles falling under the state’s securitisation act. Previously, only securities could be issued.

Luxembourg’s regulation now aligns with the European securitisation and prospectus rules, which ensure it will integrate with European frameworks.

“The Luxembourg legislator has taken the requests of the market to heart”

David Van Gaever, Counsel | Allen & Overy

Ireland is currently the jurisdiction of choice for managers incorporating CLOs. According to data from Atlantic Star, 123 CLOs were in incorporated in the country in 2021.

Luxembourg is now a solid alternative, says Luxembourg-based Van Gaever. He believes the state is now an attractive location for CLO incorporation because of its tax regime, its statutory segregation of assets and investments through separate compartments under the same vehicle, and the statutory limited recourse and non-petition provided by the securitisation act.

“This allows CLO managers to house various deals in separate compartments under one bankruptcy-remote vehicle, which will particularly appeal to managers who already operate such vehicles,” he says.

Luxembourg legislators are expanding the types of entities that can benefit from the securitisation act to include various contractual partnerships used in fund structures, in addition to classic corporates and ad hoc securitisation funds already catered for.

In anticipation of the new legislation, the Luxembourg Stock Exchange has introduced an approval and listing fee schedule aimed at CLOs.

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Global credit funds & CLO's

February 2022 | Issue 242

Published in London & New York.