While certain cross-border transactions were adversely affected by the pandemic (notably due to the disruption caused to industries such as aviation, hospitality, healthcare and retail) last year, 2021 has, to date, proven to be a very active year for the banking and finance practice.
The cross-border real estate finance market has been particularly dynamic, with many new transactions and old deals that had been put on hold picking up to completion. While the market has not fully recovered to the level preceding the crisis yet, new properties are emerging on the market, which suggests a new dynamism.
Fund finance has shown unprecedented levels of activity. 2020 had already been exceptional, but there has been a further 25% increase in deal volume. This includes technical amendments to existing facilities (upsizes, accessions of additional borrowers or guarantors, higher advance rates, extension of terms and adjustments to LIBOR related provisions),sponsors launching new funds to seize the opportunities arising from the unprecedented circumstances and putting in place bridge facility arrangements. The UK and North American institutional lenders remain keen to respond to funds' demand for traditional bridge financing arrangements. More and more net asset value (NAV) or hybrid financing arrangements are being seen, an option where higher advance rates may not be borne or as means to provide long term financing facilities that shall remain available throughout the entire life cycle of the funds, regardless of whether there remain unfunded capital commitments to be drawn down.
Alternative lenders have continued to step in to largely negate the prospect of higher pricing and fund sourcing issues (due to regulatory thresholds). Already, 2021 has seen a surge of ESGlinked subscription credit facilities governed by New York or English law.
The remainder of 2021
The outlook for the remaining months of 2021 and the year to come is very positive and Luxembourg lawmakers have been proactive in drafting new laws and regulations (a number of which will be addressed later on in this article) to prepare and adapt the financial centre and to seize new opportunities.
Inspiring Perspectives for the Securitisation Practice
In the securitisation market, 2021 has likewise, proved to be very dynamic, a continuation of the impressive volumes seen during Q3 and Q4 of 2020.
Implementation of regulations
On the regulatory front, further progress was made to clarify the implementation of Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific structure for simple, transparent and standardised Securitisation (the EU Regulation on Securitisation). Firstly, on 25 March 2021 the EBA, ESMA and the EIOPA (European Insurance and Occupational Pensions Authority) jointly published an opinion to the Commission on the jurisdictional scope of application of the STSR.
This opinion is particularly interesting in postBrexit Europe, as it clarifies the position of regulators with respect to the risk-retention, due diligence and transparency obligations of non-EU parties, which participate in a securitisation transaction subject to the STSR. While this instrument is not binding, it provides valuable insight on how the relevant regulators approach the questions treated therein.
A day later, on 26 March 2021, the same authorities published a Q&A which, amongst other topics addressed therein, confirms that underlying exposure-level documents (such as term sheets, final terms, prospectuses, facility agreements, intercreditor agreements, mezzanine documents and hedging documents) must be made available pursuant to Article 7 of the EU Regulation on Securitisation only to the extent it is "essential for the understanding of the transaction". The Q&A provides helpful insight by stating that in most securitisation transactions, it is not essential to make the underlying documentation available in order to understand the transaction, but that there would likely be a need to make documentation available in the context of commercial mortgage-backed securities with only a few underlying exposures. On 28 May 2021, ESMA published a further update to its Q&A clarifying technical and practical issues.
A trend which initiated in late 2020 and has continued into 2021 is the strong flow of securitisation transactions originating out of the US, Asian, Middle East and/or Latin American markets. These transactions which were, in the past structured through foreign jurisdictions are now being implemented through Luxembourg because of new constraints (such as diversified payment rights securitisations or REPO transactions) in originators' or lenders' jurisdictions.
These deals, where the parties are seeking to replicate, to the widest extent possible, the agreements, arrangements and structures that were previously used in (foreign) jurisdictions, may sometimes be challenging to implement in Luxembourg, and therefore require careful consideration regarding restrictions and limitations that are specific to the securitisation regime under the Luxembourg law of 22 March 2004 on securitisation, as amended (the "Securitisation Law"). These restrictions and limitations constitute a significant proportion of the subject matter of a draft law that aims at increasing the attractiveness of the Luxembourg securitisation regime.
Amendments to the Securitisation Law
On 21 May 2021, the long-awaited draft law 7825 amending the Securitisation Law (the "Draft Law on Securitisation") was lodged at the Luxembourg Parliament. The amendments contained in the draft, whether aimed at enhancing legal certainty or strengthening the flexibility of the Luxembourg securitisation regime are very ambitious and address a number of issues that have been generating legal discussions over the last 15 years. The legislative process is still in its early stages and many changes may be made before the amendments are adopted. However, a number of the contemplated amendments are expected to increase tremendously the attractiveness of the financial centre as a European hub for securitisations.
One of the main changes alleviates the conditions pertaining to the means of funding and financing for Luxembourg Securitisation Vehicles (SVs). As a matter of principle, SVs established under the Securitisation Law must finance their operations primarily through the issuance of securities (in practice, through the issuance of notes, preferential shares or units, but also derivative instruments). Additionally, they may also seek leverage by way of loans that do not qualify as securities:
- on a transitional basis (for warehousing and bridging purposes between the acquisition of the assets and the issuance of securities - prudent market practice suggests that a securitisation transaction may be entirely loan-financed at the beginning of the transaction for a period of time not exceeding 18 months); and/or
- on the basis that any lasting loan financing would not account for more than one third of the total financing.
The Draft Law on Securitisation removes these restrictions and authorises SVs to be entirely financed through borrowings.
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This article first appeared in the Chambers Global Practice Guide to Banking and Finance 2021.
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