Securitisation, an innovative approach beyond credit


Unlimited outlets: the Innovative Role of Luxembourg within securitization

The law on Securitization in Luxembourg dated March 22nd, 2004, with subsequent edits, testifies the effort of the Country to favor innovative financial solutions. This legislation has opened the road to diversified roads within securitization, overcoming the traditional models based on credit. An aspect worth addressing is the creation of segregated items within securitization vehicles, allowing the exposition to a wide spectrum of activities beyond credit. This innovative approach facilitates the transformation of such expositions to debt titles, opening the doors to a series of investment opportunities.

The consequences of the global financial crisis of 2008 have pushed for a change within the securitization scene. The governments have intervened to put together surveillance and normatives, aiming to improve the securitization vehicles transparency. Since then, the sector assisted in a careful recovery, which sounded positively in Luxembourg. With an impressive number of over 1000 securitization vehicles and abundant associated items, the market is growing at a consistent rate. The forecast indicates this ascendant trajectory will keep existing and will gain momentum in the coming years. As European leader in structured financial transactions, Luxembourg offers a welcoming legal and fiscal environment, which welcomes a wide range of risks within securitization, characterized by the reduction of complexities and almost whole fiscal neutrality.

The professional investors, defined by the MiFID II, find a simplified way to the exposition of alternative assets once considered illiquid. This is realized by obligations’ acquisition which are dematerialized and emitted, in our case, by H-Securitization SA, a non evaluated UE emittent, quoted on Multilateral Trading Facility (MTF) by Wien Stock Exchange. The titles, registered under Clearstream, offer a payment process called ‘Delivery Versus Payment’ (DVP) without obstacles, ensuring investors the chance to hold buying titles in their accounts.

Advantages for different intermediaries on the Market

Wealth Manager

The perspective of a wealth manager, of a private bank or of a fiduciary acquires a new light. Holding real assets translates into a more solid position when you look for a Lombard credit from financial institutions. The titles guaranteed by the real assets have a distinctive advantage compared to the assets themselves. This is due to the ease in which such titles can be sold in case of failure to commit to the payment terms, in contrast with the complex process of retaining several lost real assets. Moreover, the evaluation adds to the group of assets, reinforcing trust towards the credit institute in collateral evaluation.

The emitted titles from securitization vehicles, supported by wealth managers’ assets, become accessible to third investors who try to take advantage from alternative investment ways. These investors could be experts in assets and interested in the outcomes they could bring. Alternatively, they could have trust in the solidity of the asset as collateral for fixed interests. Assisting clients in structuring securitization vehicles and facilitating debt titles sale, the wealth managers lead a central role in freeing liquidity, who can re-invest in other financial instruments.

Family office

Beyond the highlighted advantages for wealth managers’ clients, which apply to family offices as well, the ability to efficiently plan the succession and inheritance is a strategic consideration that is crucial for wealthy families. Even though family offices opt for trust funds creation or foundations to retain their assets, which can comprehend financial instruments, liquidity and participation in private companies, securitization of at least some of their real assets such as real estate, art, precious metals, vehicles (vintage cars, planes, yachts, etc) can bring the following benefit:

The members of the family who own debt titles coming from securitization, based on a participation agreement, own goods of the family which can use them more easily, if not of the property of the assets, at least of the revenue of the assets. In particular, this characteristic allows the family office to manage assets more easily in a fragmented way for the members of the family and to distribute them, if necessary, without any administrative delay or complexity.

Credit Institutions

Historically, the use of securitization is surely related to risk reduction. The institutions of credit which transfer to a securitization vehicles the ownership of credits (loans), and other risky investments in their balance, allow to increase their rate of wealth adequacy (CAR), as imposed by the normative framework of financial stability of Basilea.

Private companies

The private companies which wish to access debt markets or equity markets could attract financing in a more efficient way creating a ‘feeding structure’ which emits quoted titles which are easy to acquire via banks. The risk capital can flow more easily towards companies if the equity is sold to a unique vehicle, representing all investors, instead of having different investors who come in individually in the company participation table. Even when it is about loans or other forms of debt, a single agreement would be signed with an intermediate vehicle instead of multiple agreements, potentially in conflict, with several counterparties.

Particular types

Credit-backed note

A debt title is guaranteed by one or by a pool of credit instruments which generate revenue from debt, such as obligations, loans, locations, commercial credits and other forms of credit. The Credit-backed notes can pay the investors a fixed interest during the life of the product, or distribute a periodic interest payment. Upon expiry, when allowed, or once matured, the title will be refunded at an equivalent price to the assets’ price, including any liquidity, minus the expenses collected.

Fund-feeder note

A debt title that is guaranteed by quotas of one or a pool of domiciliary investment funds in jurisdictions allow on a global level and invest in a diversified range of activity classes. The Fund Feeder Note can pay the investors a variable interest during the duration of the product, or can not distribute any interest periodically, based on the investment funds where the sector will invest, they may pay distribution on a determined cadence. Upon expiry, or once matured, the title will be refunded at an equivalent price, including any liquidity, minus the expenses collected.

Venture-syndicate note

A debt title is guaranteed by an equity emitted by private companies that operate in allowed sectors, including those dedicated to real estate development, as from other forms of credit allowed for such enterprises. A Venture-syndicate Note can pay the investors a variable interest with a variable frequency when one of the companies investing pays the dividends or is liquidated.

Real asset note

A debt title guaranteed by real assets, for example art, real estate, land, tools, natural resources, infrastructures and precious metals, etc. A Asset Note can pay the investors a variable interest rate with variable frequency when one of the companies investing pays the dividends or is liquidated.
These insights show how Luxembourg has had a leading role in defining an innovative perspective on securitization, moving beyond simple securitization of credits. The segregated compartments, simplified access for investors and the wide range of titles offer a framework where securitization evolves to face challenges and market opportunities within financial markets in constant evolution.

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