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Mortgage bonds

On February 14 2008, the bill of law 5842 (the Bill) proposing to improve the legal environment of the Luxembourg financial sector was lodged with the Luxembourg parliament. One of the aims of the Bill is to modernise the current legal environment applying to mortgage banks. The main proposed changes are:

  • Extension of the scope of collateral cover from direct claims to instruments issued by securitisation vehicles or compartments of such vehicles: the Bill proposes that a mortgage bank could refinance securitisation vehicles where only 90% of its assets are considered to be eligible investments. To protect investors and ensure the quality of the underlying collateral, the instruments issued by the securitisation vehicle or the compartment must be rated at least AA-/AA3.
  • Extension of the scope of public mortgage bonds to bonds guaranteed by a public organisation located in the EU, the EEA or the OECD.
  • Acceptance of new forms of collateral securing the mortgage bonds: under the Bill, mortgage bonds could not only be collateralised by personal guarantees of public organisations, but also by the assignment of claims, which the relevant public organisation holds towards third parties (provided the mortgage bank will hold a direct right against the relevant third party).
  • Possibility to hold indirect security: to allow mortgage banks to participate in syndicated loans or in sub-participations where the relevant mortgage bank does not hold direct security over the collateral, the Bill proposes to permit a third party to hold the security in the name and on behalf of the mortgage bank.
  • Creation of additional categories of assets to be used as asset covers: mortgage banks could issue mortgage bonds backed by mortgages on ships, vessels, aircrafts or railways located in the EU, the EEA or an OECD country, provided that the mortgage is recorded in a public register and enforceable vis-à-vis third parties.
  • Increase of the security margin to 102%: in order to increase the protection of holders of mortgage bonds, collateral cover is to be increased from 100% to 102% of the nominal value of the mortgage bonds in issue.

Danielle Kolbach

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