What is a compartment?
he european primary placement facility (eppf) S.A. (“eppf”) is incorporated as a société anonyme under the laws of Luxembourg which is similar to a public limited liability company.
The Luxembourg securitisation law of 2004, as amended, (the “Securitisation Law”) provides for the creation of segregated asset pools which are quasi “ring-fenced” in a compartment but held by one and the same legal entity, in our case being eppf.
In the case of eppf, each compartment corresponds to a distinct portion of assets financed by distinct securities. Each compartment forms an independent, separate and distinct part of the securitisation entity's estate and its assets are segregated from the other assets held by all other compartments of eppf. In other words, each compartment holds a pool of assets and liabilities to be managed separately from another compartment, so that each asset pool (i.e. compartment) is independent from the risks and liabilities of other compartments. Each compartment can be liquidated separately.
Compartment segregation means that the assets and liabilities of the vehicle can be split into different compartments, each of which is treated as if it were a separate legal entity executing distinct transactions. The rights of investors and creditors are limited to the risks of a certain compartment’s assets. The characteristics and rules applicable to a compartment may be governed by separate terms and conditions.
Who regulates eppf S.A.?
The Securitisation Law differentiates between authorised and non-authorised entities. Authorised securitisation vehicles are authorised and supervised by the Commission de Surveillance du Secteur Financier in Luxembourg (“CSSF”), which is responsible for ensuring that they comply with the Securitisation Law and fulfil their obligations.
Authorisation by CSSF entails approval of (i) the articles of incorporation or management regulations of the securitisation vehicle, (ii) the management and (iii) the shareholders.
The directors or managers of a securitisation vehicle or a management company of a securitisation fund must be of good repute and have adequate experience and means required to perform their duties whereby the shareholders must comply with the Luxembourg anti-money laundering laws.
Supervision by CSSF is directed to capture all circumstances which could potentially influence the security of investors which is why CSSF has been vested with wide investigative powers. Common means of supervision are specific legal reporting requirements.
One significant difference between authorised and non-authorised securitisation vehicles is the requirement to appoint a custodian bank applicable to authorised ones. Authorised securitisation vehicles must entrust the custody of their liquid assets and securities to a financial institution incorporated under the laws of Luxembourg or a branch of a foreign regulated financial institution. Another difference would be the authorised securitisation vehicles must appoint a statutory auditor.
Further, securitisation vehicles with issuances above a certain threshold must file quarterly reports for statistical reasons with the Luxembourg Central Bank.
eppf is an authorised securitisation vehicle, which listing with CSSF can be found at the following link:
https://edesk.apps.cssf.lu/search-entities/entite/details/7002988?lng=en&q=&st=advanced&entNames=eppf
What happens if the compartment does not pay interest or principal?
The Luxembourg Securitisation Law allows for contractual provisions that are valid and enforceable and which aim to protect the securitisation vehicle from the individual interests of involved parties, consequently enhancing the securitisation vehicle’s protection as follows:
- Limited-recourse provision: Limited recourse means that the rights of the investors and creditors of a compartment are limited to the assets of such compartment; and
- Non-petition provision: Non-petition means that investors and creditors may waive their rights to initiate insolvency proceeding against the securitisation vehicle. This clause protects the securitisation vehicle against the actions of individual investors of one compartment affecting the operation of the other compartments.
eppf has opted to benefit from such contractual arrangements which function as if each department were a separate legal entity.
Therefore, each compartment can only be liable for the obligations associated with the assets it actually holds or can realise. In order to enhance the investors’ position for regress, eppf provides in its standard documentation for a guarantee on first demand. In case of non-payment by the guarantor under the Back-to-Back Business (as defined below), investors enjoy the freedom to claim their payments directly against the guarantor under such ‘first demand’ guarantee. A guarantee on first demand means that the beneficiary of such guarantee can pursue its claim against the guarantor without The guarantor is obliged to pay and cannot make any defences at the time of the claim; defences can only be put through later. If the claimant didn’t actually have a right to the claim, he will need to return the money received (principle of “first pay, then sue”).
How is an eppf S.A. compartment bond to be classified under the German investment regulation (Anlageverordnung)?
eppf has consulted several leading law firms on this matter and the unanimous opinion is that eppf compartment bonds with a direct guarantee are to be treated as the guarantor itself.This means that if the guarantor is a company, the compartment bond is to be treated as a corporate bond. If the guarantor is a public entity, e.g. a city, the compartment bond is to be treated as a public bond.
Is an eppf S.A. compartment bond a securitisation/ABS?
No. eppf compartment bonds are neither:
- tranched, i.e. there are no junior, senior or mezzanine tranches;
- portfolio of assets; nor
- subject to a payment waterfall.
The nature of eppf compartment bonds is full transparency which is achieved by a mere passing-through of the obligations which are mirrored in the Back-to-Back Business (as defined below). In addition, the guarantee allows direct recourse against the guarantor, which is not the case in a securitisation. The term securitisation vehicle which is used for eppf under the Securitisation Law is unfortunately misleading in this context, as not every securitisation vehicle must or does carry out securitisations.
Where can eppf S.A. compartment bonds be found in Bloomberg/Refintiv?
eppf compartment bonds can be found under the ticker of the respective guarantor rather than under the ticker of eppf. This is the consequence of eppf’s fully transparent nature.
What happens if eppf S.A. becomes insolvent?
The Securitisation Law provides that the assets are available exclusively to satisfy the investors’ and creditor’s claims against the securitisation vehicle or an individual compartment in case of the existence of several compartments. Therefore, the operation of Luxembourg law prevents insolvency contamination between different compartments.
From an investors’ perspective, the securitisation vehicle is bankruptcy remote. A bankruptcy remote structure provides reasonable certainty that the financial instruments issued are collateralised by assets that have been isolated legally from the transferor, i.e. the guarantor, in all possible circumstances, including insolvency. Therefore, no recourse can be made by the creditors or liquidator to the securitisation vehicle’s assets.
Recovery of the financial instruments issued depends entirely on the securitisation vehicle’s assets held in the relevant compartment, i.e. that such assets generate sufficient cash-flow when obligations under the issue are due. However, in case of eppf, the investors also have full and direct recourse to the guarantor via the guarantee on first demand.
As eppf is regulated, CSSF may intervene in the same way as with any other financial institution. This may include forced sales, orderly winding down or other measures.
What happens if the guarantor becomes insolvent?
Since creditors being able to take direct recourse under the first demand guarantee from the guarantor they can participate in the insolvency proceedings and file their claims in a timely manner.
Who is responsible for the content of the info memorandum?
The info memo is composed of three parts, a different person assuming responsibility for each part as follows:
- Securities note: This part is the longest and most comprehensive of the info memo. It contains all the terms and conditions of the bond, i.e. amongst others the so-called boiler plate provisions, the selling restrictions, the pro forma guarantee and the pro forma pricing supplement. This part is the responsibility of eppf.
- Issuer description: eppf is described in more detail. This description is largely based on the EU Prospectus Regulation. eppf is also responsible for this part.
- Guarantor description: The guarantor is described in more detail. This description also follows the guidelines of the EU Prospectus Regulation. The guarantor is solely responsibility for this part.
Does the info memorandum or the information contained therein need to be up to date?
Yes, the information contained in the info memorandum must be up-to-date, correct and complete and no material information must be missing when issuing a bond. This applies to the first issue as well as to subsequent issues. Updated information is published either via an addendum or a restatement.
Generally, eppf does not intend to provide any post-issuance transaction information in relation to any bond or the performance of any Back-To-Back Business in respect of such bond.
If no further issues are planned, continued updated information obligations may arise nonetheless when the bond is listed on an exchange or an exchange-regulated market according to the rules of procedure of the stock exchange/exchange regulated market require. The information updates will be announced by the relevant compartment in compliance with the publication methods prescribed in the terms and conditions of the bond. In most cases, these include the publication on the website of the exchange/ exchange regulated market, of the issuer or via the clearing system.
Is a compartment liable for the liabilities of another compartment?
Due to the nature of a compartment there is no recourse against the assets allocated to other compartments in the event that the claims under the securities held by the investors of a particular compartment are not fully satisfied by the assets of that compartment.
Each of the compartments can be liquidated separately without any negative impact on the vehicle’s remaining compartments, i.e. without triggering the liquidation of other compartments. If the securitisation vehicle is a corporate entity, all compartments can be liquidated without necessarily liquidating the whole vehicle.
Are general costs of eppf S.A. allocated to the compartments?
Under the Securitisation Law, fees, expenses and other liabilities incurred on behalf of the securitisation vehicle which do not relate specifically to any compartment alone may be under certain circumstances payable out of the assets allocated to all compartments. This is not the case for eppf where all fees, expenses and other liabilities incurred are assumed by ‘Compartment A’ which leads to the ring-fencing of for example general costs.
What is the difference between NowCM and eppf?
eppf was founded in 2015. In 2021 the eppf group acquired NowCP, a regulated marketplace in France which lead to the rebranding to NowCM (Now Capital Markets) and will be executed with regard to eppf in due course. eppf S.A. will be renamed ‘NowCM Luxembourg S.A.’, short ‘NowCM Lux S.A.’.
Are eppf S.A. bonds ECB eligible?
eppf compartment bonds are considered marketable assets under the ECB collateral framework provided they fulfil the general requirements set forth in such framework, mainly the following:
- Sufficiently high credit quality (rating) from a recognised rating agency or other recognised body;
- Listing on a recognised exchange regulated market;
- Legal opinion with regard to the validity of the guarantee.
Can a compartment be consolidated with the guarantor?
A compartment may or may not be consolidated in the annual financial accounts of the guarantor. Generally, the compartment will be consolidated and, therefore, the compartment’s liabilities and assets will show as such guarantor’s. Nevertheless, eppf S.A. will also show all compartments in its own accounts.
Can a compartment have more than one guarantor?
Yes, compartments may have more than one guarantor. eppf will create a new compartment for each guarantor and will keep this for the relevant guarantor’s exclusive use to issue one or more bonds guaranteed by the relevant guarantor. In specific cases, a compartment could have more than one guarantor, but they should all be part of the same group, e.g. upstream guarantees from subsidiaries.
Can a compartment issue more than one bond?
Yes, a compartment may issue several securities (bonds) corresponding to different collaterals/risks and providing different values, yields and redemption terms.
What is a Back-to-Back Business?
eppf will use the proceeds from the offering of each bond solely to enter into a corresponding back-to-back agreement or debenture (each is a “Back-To-Back Business”) with the guarantor or designated group company of the guarantor (the “Obligor”). Each Back-To-Back Business can be in the form of a loan, loan note, registered note, bearer note or any other form as specified in the applicable pricing supplement. The Obligor will use the proceeds from such Back-To-Back Business as specified in the relevant pricing supplement. The Back-To-Back Business will have substantially the same terms as the bond, for example status interest, currency, principal amount, payment dates and maturity date, call and put options. The relevant compartment will apply all proceeds under the Back-To-Back Business towards the payment obligations under the bond. The Back-to-Back Business is designed to meet the obligations under the bond towards the investors when due.