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 4,579 vehicles as at end of 2020 out of which 29.3 per cent were domiciled in Luxembourg and 29.8 per cent were domiciled in Ireland. This market segment has slightly grown by 0.7 per cent to 4,610 vehicles at the end of Q1 2021. Ireland was capable to bring its market-share to 29.9 per cent (increase of 0.1 bps) while Luxembourg lost 0.2 bps in market-share. However, Luxembourg and Ireland together still represent 59.0 per cent of the entire Euro Area market and Luxembourg remains being one of the most beneficial domiciles for securitization vehicles.
Luxembourg market developments Q1 2021
Development of securitized assets (stock)
The stock in securitized assets increased in 2020 from EUR 302.0 billion to EUR 338.6 billion or plus 12 per cent. Q1 2021 shows a further increase to EUR 339.6 billion representing a slight increase of 0.3 per cent. To that end, the market growth is not visible at the first sight.
Development of securitization vehicles
Q1 2021 shows the number of foundations at 38 (Q1 2020 = 34) new vehicles; a growth rate of almost 12 per cent. Similar to that, the number of liquidated vehicles reduced in Q1 2021 to 27 (40 for Q1 2020); a reduction rate of almost 33 per cent. While the foundations increased and the liquidations decreased, there is a net increase of eleven entities or a growth of almost 1 per cent compared to the existing vehicles at year end 2020 just within the first quarter.
Out of the 38 newly funded vehicles in Q1 2021 there are 31 funded as securitization company and seven as securitization fund. Hence, the number of newly funded securitization funds reached 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 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 31 securitization companies: 24 were created as a private limited liability company (societé à responsabilité limitée or S.à r.l.) and only seven were created as public limited liability company (societé anonyme or S.A.). Other available legal forms were not utilized during Q1 2021 and the trend to create mainly S.à r.l.’s continues since 2017.
Development of compartments in Luxembourg
One of the key features of the Securitization Law, which remains unchanged by the draft 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 increased from 7,981 in Q4 2020 to 8,131 in Q1 2021; a growth rate of 1.9 per cent.
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 position paper published by the Luxembourg Capital Market Association on the impact of interest limitation rules on securitization vehicles as well as the general guidance published by the Luxembourg tax authorities on interest limitation rules help to remove taxation uncertainty from the markets.
Therefore, our outlook for 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 for optimisation
- 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)