Securitization in Luxembourg continues to grow in 1st half 2021 (H1 2021)

Recap on the market development of the year 2020

Securitization in Luxembourg is usually governed by the Securitization Law dated 22 March 2004. The securitization vehicles funded in Luxembourg in 2020 showed a reasonable yearly growth rate. The number of newly funded vehicles in 2020 was 145 (previous year 141) and remains on the same high level established since 2015. The number of liquidated vehicles counted to be at 92 (previous year 119) and is hence clearly reduced, but still on a high level established since 2017. The net increase in vehicles is with almost 4% positive but moderate. However, these 145 newly funded vehicles represent a gross increase of more than 10% calculated based on the vehicles existing at the end of 2019, which reflects the continued high demand for securitization in Luxembourg.

How is Luxembourg positioned within the Euro Area?

Analyzing the European Central Bank Financial Vehicle Corporations statistic reported each quarter, it turns out that Luxembourg is one of the most favorable countries for domiciliation of securitization vehicles within the Euro Area with  its main competitor being Ireland. Other markets in the Euro Area are more domestic markets without attracting international players too much. Hence, we focus our comparison to Ireland, Luxembourg’s most relevant competitive market. Since many years, Luxembourg was leading the Euro Area market while the situation changed for the first time at the end 

of the year 2020. The total Euro Area market sums up to 4,588 vehicles as at end of 2020 out of which 29.2% were domiciled in Luxembourg and 30.3% were domiciled in Ireland. This market segment has grown by 2.2% to 4,691 vehicles at the end of H1 2021. At H1 2021 Ireland had a market-share of 30.2% (decrease of 0.1 bps) while Luxembourg kept its market share stable at 29.2%. However, Luxembourg and Ireland together still represent 59.4% of the entire Euro Area market and Luxembourg remains being one of the most beneficial domiciles for securitization vehicles.

Luxembourg market developments H1 2021 

• Development of securitized assets (stock) 

The stock in securitized assets increased in the year 2020 from EUR 302.0 billion to EUR 338.6 billion or plus 12%. H1 2021 shows a further increase to EUR 346.1 billion representing a slight increase of 2.2%. To that end, the market growth is relatively aligned with the growth in number of existing vehicles.

• Development of securitization vehicles 

H1 2021 shows the number of foundations at 78 (H1 2020 = 71) new vehicles; a growth rate of almost 10%. Contrary, the number of liquidated vehicles reduced in H1 2021 to 39 (48 for H1 2020); a reduction rate of almost 19%. While the foundations increased and the liquidations decreased, there is a net increase of 39 vehicles or a growth of almost 3% compared to the existing vehicles at year end 2020. 

Out of the 78 newly funded vehicles in H1 2021 there are 67 funded as securitization company and 11 as securitization fund.  Hence, the number of newly funded securitization funds exceeds already the number of securitization funds newly created in the full year 2020, which is inter alia due to the fact that the securitization fund is not subject to ATAD I interest limitation rules. Nevertheless, the newly funded securitization vehicles are clearly dominated by the well-known securitization company, despite being subject to interest limitation rules. Out of those 67 securitization companies: 48 were created as a private limited liability company (societé à responsabilité limitée or S.à r.l.) and only 19 were created as public limited liability company (societé anonyme or S.A.). Other available legal forms were not utilized during H1 2021 and the trend to create mainly S.à r.l.’s continues since 2017.

• Development of compartments in Luxemburg 
  

One of the key features of the Securitization Law, which remains unchanged by the draft law (Luxembourg bill 7825) amending the Luxembourg Securitization Law, is the compartmentalization feature representing the option to create fully separate and ring-fenced compartments within one securitization vehicle. In the absence of statistical data on compartments, an indication on the number of compartments in Luxembourg can derive from the ECB statistics on financial vehicle corporations, of course and without doubt with limitations. The number of reported transactions decreased from 7,981 in Q4 2020 to 6,477 in Q2 2021; a reduction rate of 19%¹.

Outlook 2021

The existing Securitization Law continues to provide for a robust and reliable legal framework for securitization in Luxembourg and the additional structuring options provided for in the recent draft law amending the Securitization Law will give a further push to the market and makes it more interesting than ever before. 

The “Technical position paper on deductibility of payments by securitization companies financed by debt” dated October 2020 and prepared by the Luxembourg Capital Market Association as well as the general guidance “Limitation de la déductibilité des intérêts” published  by the Luxembourg tax authorities on interest limitation rules in January 2021 help to remove taxation uncertainty from the markets. The creation and liquidation situation in the first half of 2021 has  confirmed the positive trend of the first quarter 2021. 

Therefore, our outlook for the full year 2021 is clearly positive and we expect that 2021 will see more new securitization funds than ever and we also expect to see many more new securitization companies and compartments. In terms of liquidations we expect a further slight decrease in number. Overall, Luxembourg continues to be a main domicile for securitization within the Euro Area.

What does it mean for you? 

• Structuring and securitization setup

Luxembourg continues to be a preferred domicile to host your securitization transactions and it doesn’t matter if you plan as an originator to utilize a securitization vehicle or if you plan to create a structured product for your clients, for example in the asset management industry. There are solutions for all purposes.

How EY can help? 

We can offer our services in following areas:

• Financial statements audit of securitization vehicles 
• Feasibility assistance on a contemplated securitization project
• Impact assessment of new tax regulations and assistance in choosing the most efficient structure 
• Corporate advice and assistance in connection with the SV business cycle
• Financial due diligence to assist in the portfolio acquisition process
• Financial modelling services (e.g., cash flow modelling forecasts)