HIGHWAY TO THE DEBT ZONE

Driven by a regulatory wave and historic low interests, the industry has gone through transformative changes over the last few decades and is now playing a key role in the Capital Markets Union, the European Commission’s action plan for a more inclusive and resilient economy.

Governments across the EU funded 76% of their debt finance through bonds in 2019. Last April, the Grand Duchy issued bonds with negative interest rates to finance the fight against Covid-19, taking advantage of record low borrowing costs.

Willem Bon, Tax Partner at Loyens & Loeff, sees this moment as unprecedented. “It is the world upside down for me, which has almost always seen positive interest rates in bonds. We now see a growing number of corporate bonds being issued at negative rates.” Quite a few issuers also used this moment to refinance by raising new debt at a lower interest rate and using the proceeds to repay the existing issuance. A sign that the market is catching up with these lower interest rates.

CONNECTING INTERNATIONAL INVESTORS AND BORROWERS

Luxembourg has come a long way since the issuance of the first Eurobond in 1963, marking the beginning of debt capital markets in the country. In line with the strong need for debt capital markets, its financial centre has developed a comprehensive expertise in the sector. Over the past few decades, it has grown into an international leader in debt capital, structured finance vehicles, as well as an acknowledged platform for hosting landmark international IPOs.

“Luxembourg is small enough to know that the world is bigger than itself, and the market is big enough to accommodate international issuers with international requirements. Its offering can be used exactly where it is needed and can blend perfectly into an international structure with non-Luxembourg elements,” explains Bon.

Home to Europe’s leading stock exchange for bond listings, it has gained further international market recognition with the launch of the Luxembourg Green Exchange, the world’s first exchange dedicated to ESG securities. In 2019, approximately EUR 1.18tn of debt was listed in Luxembourg.

While the sector was traditionally dominated by banking clients, the market has seen the entrance of new industry players. “We see international asset managers with fund vehicles in Luxembourg now using capital market as finance vehicles for the entire groups that they are managing, be it real estate, distressed debt, repackaging of fund units or structured products,” adds Mausen.

The use of UK law for debt issuance will remain dominant for the next few years. Yet Mausen notes that it might change. The European Stability Mechanism and the European Commission announced early 2020 its decision to issue bonds in Luxembourg law and others are following suit.

“We see issue programs covered by Luxembourg law. We see more and more issue programs and banking facilities arranged by international banks governed entirely by Luxembourg law. It is something that five years ago, nobody would have ever dreamed of.”

REVITALISING SECURITISATIONS

While securitisation issuance dropped following the US subprime crisis as a direct underlying factor of the financial crisis, it is now back in the game following regulations making it safer and more transparent for investors. Playing a key role in the EU’s Capital Markets Union project, it serves as a substantial source of company financing, bridging the gap between deleveraging banks and investors looking to diversify their portfolios in Europe’s bank-dominated financial system.

“Securitisation acts as a key tool to support the real economy, to help the SME sector and create liquidity in the market. It provides an additional channel for companies to refinance post Covid-19. In this respect, it is part of the solution,” highlights Nicolas.

Luxembourg has maintained its position as one of the leading centres for securitisation and structured finance vehicles with a dedicated securitisation law ensuring innovation and legal certainty in securitisation structures.

“Despite the increased regulation in securitisation, we have not seen a drop in securitisation transactions; on the contrary, people generally welcomed the increased transparency that was introduced by the new regulation. Overall, the market dealt well with these new requirements,” adds Mausen.

SUPPORTING THE PUSH FOR SUSTAINABILITY

The transition to a sustainable global economy requires scaling up the financing of investments that provide environmental and social benefits. Debt capital markets can play an essential role in attracting private capital to finance these global needs. According to the Climate Bonds Initiative, in 2019 a global record of $257 billion of green bonds was issued worldwide, representing an increase of 51% from 2018.

To meet the needs from investors and issuers, a wide range of market-driven products have been designed to help finance sustainability strategies. Sustainability-Linked Bonds (SLBs) is the latest addition to the universe of sustainable debt instruments.

“Issuers have not exhausted all the solutions available to them. They seek quick access to liquidity at low costs, while investors aim for higher returns with lower risks. Investors may also search for exposure to certain asset types or focus on non-financial goals and want to see these aspects reflected in their products. Sustainability-linked bonds match this investor demand for ESG while also meeting the needs of issuers who clearly prefer a general corporate-purposes bond. Despite the success of green bonds that are now an integral part of Luxembourg’s strengths, we understand that there are not one size fits all products and constantly thrive to provide new solutions for each individual player,” highlights Lindner.

The transformative change the industry has gone through over the last few decades is set to accelerate with the advent of FinTech, Blockchain and AI, bringing a set of new opportunities.

“You are in a stringent regulatory environment that gives you a lot of rules, but you do want to see opportunities. We have seen so many crises over the last 20 years that it is actually nice to see that the market keeps going and that there is always a solution,” she concludes.