The Law on Securitisation and Covered Bonds, as well as related amendments to other legal acts, have recently entered into force in Lithuania. The amendments aim to contribute to the development of Lithuania’s capital market and to broaden the diversity of sources of funding. The new regulations will give financial institutions more opportunities to raise funds and finance businesses and contribute to the long-term growth of the country’s economy.
Securitisation allows lenders to refinance sets of loans and exposures
Among other things, the package of the new regulation includes amendments to the provisions of the Law on Consumer Credit, valid since February 2016, and the provisions of the Law on Credit Related to Real Estate (hereinafter referred to as the Law on CRRE), valid since July 2017, prohibiting the transfer of claim rights under valid credit agreements to a person not included in the relevant public list of credit providers.
This limitation has created several challenges for non-banking market players seeking to raise funding from alternative funding sources, including various securitisation schemes. However, since 22 July 2022, when the amendments to the legal acts related to the new regulation came into force, this limitation has no longer applied when a special purpose company or any entity not established in Lithuania takes over rights and obligations from the creditor under credit agreements, as stipulated in the Law on Securitisation and Covered Bonds.
Securitisation allows a lender (whether a credit institution or a non-banking market player) to refinance a set of loans or exposures, such as real estate loans, car leases, consumer loans, or others, by turning them into securities that can be traded on the secondary market, and the entities that initiated the securitisation receive funds for new investments and expansion of their activities.
The new exception does not have any negative impact on the protection of debtors’ interests
- The special purpose vehicle must, among other things, comply with the provisions of the Law on Consumer Credit and the Law on CRRE as far as the protection of debtors’ rights is concerned, if the collateral property consists of claim rights against debtors who prior transfer were subject to the provisions of the aforementioned legal acts. Accordingly, debtors will have all the rights and obligations set out under the Law on Consumer Credit or the Law on CRRE, even though the claim rights have been transferred to the special purpose vehicle.
- The special purpose vehicle will not carry out any new lending activities, and the collateral assets will be transferred to it only to properly implement the principle of separation of the collateral assets from the issuer (the entity that initiated the securitisation).
Impact of the new regulation on business conditions and their development
The establishment of the regulation on securitisation is important for several aspects:
- It provides more opportunities to significantly reduce financing costs. Lower financing costs are important not only for credit institutions but also for other non-banking market players which do not have access to the cheaper short-term and central bank financing instruments usually available only to banks. In this way, residents of Lithuania also receive indirect benefits (for example, cheaper consumer or housing loans).
- The new regulation introduces legal certainty regarding the application of laws on securitisation in relation to providers of consumer credits and credits related to real estate, and in this way creates conditions for market players in the non-banking sector to use securitisation instrument more efficiently. This increases the range of financing sources and tools, which provides an opportunity to release companies’ capital and increase business financing opportunities with the funds received.
- Securitisation develops capital markets.
- The new regulation also contributes to the diversification of risks in the financial sector and strengthens the overall stability and resilience of the financial system.