Securitization

Asset-Backed Notes

An Asset-Backed Note

(“ABN”) is a financial security, belonging to the wider category of Asset-Backed Securities (“ABS”s), that is normally issued by a Special Purpose Vehicle (“SPV”) and that is historically collateralised by a ‘tranched’ pool of assets such as automobile loans, student loans, leases, corporate debt, credit card debt, royalties, intellectual property, asset-backed commercial paper or future cash flows on activities (receivables).

An ABN is similar to a Mortgage-Backed Security (“MBS”), except that the underlying securities are not mortgage-based.

Lux Securitization Law

In Luxembourg, the Law of 22 March 2004

on securitization, and amending (the "Lux Securitization Law"), extended the universe of assets acquirable by a Luxembourg SPV dedicated to securitizations (also known as a “Securitization Vehicle”) and permutable into a security, by going beyond the traditional notion of ‘credit risk repackaging’ and including also illiquid assets such as residential and commercial real estate, physical commodities, real assets, as well as financial instruments such as bonds, shares, derivatives, investment funds, currencies, precious metal, etc.,

thus effectively widening the investable universe of the Simple, Transparent and Standardised Securitization (“STS Securitization”) most recently defined in the Regulation (EU) 2017/2402 (the “Securitization Regulation”), entered into force as of January 2019, whose regulatory scope is limited to the repackaging of credit risk via the issuance of Tranches1, as per the traditional notion of ABS.

Currently a Luxemburg Securitization Vehicle can issue ARBNs without being subject to the Securitization Regulation...

The Luxembourg securitization vehicle issuing an ABN can be constituted as a company or as a fund.

A securitization company must take the form of a Public Company Limited by Shares (“SA”), a Private Company Limited by Shares (“SáRL”) or a Limited Partnership (“SCA”) and it can create one or several compartments corresponding to a distinct part of its holding. A securitization fund is formed contractually by a management company (the "Manco"), an entity in charge of the corporate governance for such fund, via the General Management Regulations.

The appointment of an auditor for such vehicle is mandatory. The Luxembourg Securitization Vehicle can have one or more legally segregated compartments, each potentially issuing one or more ABNs.

Also, the vehicle does not require to be regulated by the Luxembourg financial regulator

the Commission de Survellience du Secteur Financier (“CSSF”) if it does not issue debt securities to the public on a regular basis.

The ABNs can give exposure to a pool of illiquid assets as well as financial instruments, with or without ‘tranching’.

Such ABNs can be marketed to Professional investors without the requirement of a base prospectus approved by a regulatory authority of the EU, under the exemption granted by the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 (the “EU Prospectus Regulation”).

Custodiable Alternative Assets

Asset-backed notes issued by a Luxembourg securitization vehicle’s compartment are the result of a Securitization2 that pools assets together and makes them marketable as a tradable financial instrument with an International Securities Identification Number (“ISIN”).

The Luxembourg securitization vehicle issuing notes can have or not a credit rating, but even if not rated it is important to highlight that it is formed under local laws that permit ring-fencing of assets and liabilities in separate compartments each issuing different ABNs, thus limiting the default risk of the SPV itself.

ABNs can be ‘in registered form’ or ‘dematerialised’. When in registered form, they can be registered and transferred electronically, allowing investors to purchase them from their existing banking or brokerage account through a delivery-versus-payment (“DVP”) settlement system via by a reputable Central Securities Depositary (“CDS”), such as Clearstream, Euroclear, Euronext Securities Milan, etc.
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When dematerialised, the Luxembourg Securitization Vehicle requires the services of a Paying Agent, who is normally a corporate trust department of a bank designated to create securities inventory with the ICDS and to make dividend, coupon and principal payments to the investors.

Registered form or Dematerialised

Unlisted or Listed

These ABNs can also be ‘unlisted’ or ‘listed’ on one or more authorised EU exchanges, typically in the Multilateral Trading Facility ("MTF") segment of such exchanges, however given that ABNs issued by Luxembourg Securitization Vehicle can also invest in.
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lliquid assets (and they normally do), it is more likely that, due to their very limited or non-existent liquidity, such ABNs cannot manage to have a full listing with market-making, but rather only a ‘technical listing’ with a mostly static price.

Registered form or Dematerialised

Unlisted or Listed

Because of the bankable nature of dematerialised ABNs and thanks to their issuance being subject to the EU Prospectus Regulation regulatory framework, and related exemptions, which allow for free distribution within all EU member states to Professional Investors,

“these debt securities are a preferred choice to

act as a 'wrapper' or 'feeder' for non-EU

companies and funds alike to bridge the

regulatory gap between their country of

domicile and the EU, thus allowing for a

seamless connection to EU investors”.

1*Tranches are ‘pieces’ of a pooled collection of securities, usually debt instruments, that are split up by risk or other characteristics in order to be marketable to different investors. Each portion, or tranche, is one of several related securities offered at the same time but with varying risks, rewards and maturities to appeal to a diverse range of investors.

2*Securitization in its stricter meaning, is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). More in general, it can be defined as the process of taking illiquid assets as well as other financial instruments that are not securities (for instance financial derivatives) and transforming them into a security.

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