yooro - 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”).

An ABS is, historically, collateralised by a ‘tranched’ pool of assets such as automobile loans, student loans, residential mortgages, leases, corporate debt, credit card debt, royalties, intellectual property, asset-backed commercial paper or future cash flows on activities (receivables finance).

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 'transformable' into securities, 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 “EU Securitization Regulation”), entered into force as of January 2019, whose regulatory scope is limited to the repackaging of credit risk via the issuance of tranches, as per the traditional notion of ABS.

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

The Luxembourg securitization vehicle issuing an ABN can be constituted as a company or as a 'transparent' fund or Special Limited Partnership ("SCSp"). 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, whereas the SCSp requires the appointment of a general partner ("GP") via a Limited Partnership Agreement ("LPA").

The appointment of an auditor for such vehicle is mandatory in Luxembourg. The 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 securitization that pools assets together and makes them marketable as a tradable financial instrument with an International Securities Identification Number (“ISIN”) allocated by a EU National Numbering Agency ("NNA").

The Securitization Vehicle issuing notes may 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 certificate form’, ‘dematerialized’ or, with the recent introduction of the Blockchain technology, now also ‘tokenized’. When dematerialized, 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 dematerialized, the 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 CDS and to make dividend, coupon and principal payments to the investors.

A more recent alternative is the tokenization of financial instruments as ‘security tokens’, i.e. digital representation of securities via Distributed Ledger Technology (“DLT”), on an open public blockchain such as Ethereum, Polygon, and others. This is called a Security Token Offering (“STO”), where the issuer ‘mints’ such securities via a smart contract on the DLT of choice and then transfers them to the investor’s compatible crypto wallet address, which has been previously ‘whitelisted’ by the issue to guarantee full successful due diligence on the investor herself. When a security is tokenized, no paying agent is required, and settlement costs are typically much lower than with dematerialized securities, with investors directly ‘owing’ the token, and therefore the security, in the DLT instead of in a securities account of a bank that acts as nominee for the investor.

Certificate form, Dematerialized or Tokenized

Unlisted or Listed

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 illiquid 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. It is to be noted though that tokenized securities are not yet allowed to be listed on a EU exchange as of yet, despite such arrangement is expected to change in the near future with the introduction of Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology (the “DLT Pilot Regime Regulation”).

Certificate Form, Dematerialized or Tokenized

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 allows 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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