On 8 December 2021, a new law on the issuance of covered bonds (the “Covered Bonds Law”) entered into force, implementing the Directive (EU) 2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issue of covered bonds and covered bonds public supervision (the “Covered Bonds Directive”) and modifying the previous legal framework.
Covered bonds are debt obligations issued by credit institutions and secured against a ring-fenced pool of assets which offer a dual recourse protection for bondholders: they have direct recourse as preferred creditors and, at the same time, they remain entitled to claim against the issuing entity as ordinary creditors. The covered bonds are considered as a stable source of investment, expanding the capacity of credit institution to provide financing to real economy.
The Covered Bonds Law and the Covered Bonds Directive have introduced two main features compared to the previous legal framework.
Firstly, the new legal framework has abolished the monopoly related to the issuance of the covered bonds. Under the previous regime, only credit institutions approved by the Luxembourg Supervisory Commission for the Financial Sector (Commission de Surveillance du Secteur Financier) (CSSF) as covered bonds bank (banques d’émission de lettre de gage) and only dedicated to such activity could issue covered bonds. Under the new legal framework, all credit institutions incorporated in Luxembourg and meeting some financial criteria and the covered bonds bank (banques d’émission de lettre de gage) can issue covered bonds.
Secondly, the new legal framework has enhanced the types of covered bonds which a credit institution can issue. Alongside public covered bonds, mortgage-backed bonds, movable-backed bonds or green covered bonds, the new legal framework has added two types of covered bonds:
- European covered bonds, issued in respect of loans secured by physical assets subject to public registration or in respect of loans secured by public sector entities; and
- (high-quality) European covered bonds, issued in respect of loans secured by high quality eligible assets meeting the criteria set out under article 129 of the Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment.
Under the Luxembourg law of 16 July 2019 on prospectuses for securities, offer of debts securities cannot be made to the public in Luxembourg without a prospectus approved by the CSSF.
Once issued (by a credit institution incorporated in Luxembourg or by a foreign credit institution), covered bonds can be listed at the in Luxembourg Stock Exchange (“LuxSE”). More than 285 issuers from 44 jurisdictions have listed their covered bonds at the LuxSE. The LuxSE enables the issuers to have access to greater visibility among international investors and to benefit from rapid and efficient listing process.