Banking & Finance 2021

Last Updated October 05, 2021

Luxembourg

Law and Practice

Authors



GSK Stockmann is a leading independent European corporate law firm with over 200 professionals across offices in Germany and Luxembourg. GSK Stockmann is the law firm of choice for real estate and financial services. In addition, the firm has deep-rooted expertise in key sectors including funds, capital markets, public, mobility, energy and healthcare. For international transactions and projects, GSK Stockmann works together with selected reputable law firms abroad. In Luxembourg, GSK Stockmann is the trusted adviser of leading financial institutions, asset managers, private equity houses, insurance companies, corporates and fintech companies, with both a local and international reach. The firm’s lawyers advise domestic and international clients in relation to banking and finance, capital markets, corporate/M&A and private equity, investment funds, real estate, regulatory and insurance as well as tax. More about the firm: www.gsk-lux.com.

Luxembourg’s economy has been strong and steadily expanding over recent years. Prior to 2020, the real economy was booming and the business and credit cycle was conspicuously moving upwards. Nonetheless, in 2020, the economy suffered a -1.3% recession; in total, a 3.1% reduction in GDP compared to 2019. Despite the significant reduction in GDP, the loan market continued to grow in 2020, since the total loans provided (to banks and deposit-taking institutions, to the general government and to the real economy) increased by 4.43% in comparison with 2019. Even though the growth of the loan market was slightly lower than the growth in 2019 (5.82%), the 2020 recession did not have a significant effect on the loan market of Luxembourg.

Nonetheless, apart from the fluctuations in GDP, the provision of credit is also affected by the implemented regulatory framework. Low interest rates – which are a result of, among others, the European Central Bank's (ECB’s) pandemic emergency purchase programme – create a strong stimulus to market participants to incur debt and invest in the real economy. At the same time, the low repo rates increase the profitability of credit institutions, which are consequently incentivised to increase the provision of loans to the market. Finally, the continuing increase of the prices of real estate property in Luxembourg facilitates the provision of credit either in the form of new loans or of refinancing existing loans.

In addition, Luxembourg remains a major international financial centre, with a booming asset management industry (with a total of EUR5,541.371 billion of assets under management as at 31 July 2021) and a sound banking system, with more than 128 established banks (as at 31 December 2020). Luxembourg's financial centre continues to attract financial institutions and investors from across the world.

The Luxembourg economy, having had growth of 3.1% and 2.3% in 2018 and 2019 respectively, was less impacted by the COVID-19 pandemic than other EU countries. 2020 was marked by a -1.3% recession, which, despite being better than average compared to the rest of the EU, is the sharpest decline since the financial crisis in 2008–09 for the Luxembourg economy. Similar to the global economy, lockdown measures, especially in the first half but also in the fourth quarter of 2020, have had a significant impact on private consumption and Luxembourg’s international trade in goods and non-financial services. Furthermore, the financial soundness of the Luxembourg economy allowed the Luxembourg government to provide financial assistance to certain businesses – including those operating in the hospitality, accommodation and entertainment sectors – in order to help them to face their liquidity shortages related to the coronavirus outbreak.

Despite the above, the financial sector of Luxembourg has shown its resilience and stability. Contrary to the financial crisis of 2008–09, banks are considerably stronger and in a much better liquidity position than 13 years ago. Their strong position is depicted in the relatively insignificant effect that the COVID-19 pandemic had on the credit market (see 1.1 Impact of Regulatory Environment and Economic Cycles). Despite the pandemic, Luxembourg's employment market continues to attract a highly skilled and multilingual workforce.

The Luxembourg Stock Exchange (LuxSE) is the leading European listing venue for high-yield bonds. Together with the European High Yield Association, LuxSE published in 2006 the first EU guidance and rules on listing high-yield bonds, allowing corporate issuers with complex ownership structures access to capital markets. LuxSE now accounts for approximately 50% of the listed high-yield bond market in Europe. A large number of such high-yield bonds are listed and admitted to trading on the multilateral trading facility (Euro MTF) operated by LuXSE. Being outside the scope of (i) the Prospectus Regulation (EU) 2017/1129 and (ii) the transparency requirements set forth in Directive 2004/109/EC, the Euro MTF is not a regulated market and, hence, offers a lighter listing and disclosure framework to issuers.

High-yield bonds are regularly issued by corporate entities for financing, refinancing and general corporate purposes.

Even though the majority of high-yield bonds listed on the LuxSE are governed by foreign laws, market players now choose Luxembourg more frequently as the governing law of the high-yield bonds issue documentation. Furthermore, thanks to a stable and reliable legal framework, Luxembourg vehicles are often used for the issue of high-yield bonds.

Furthermore, since October 2020, the European Stability Mechanism decided to use Luxembourg law as the governing law for the issue of its euro-denominated bonds. This has been seen as a major recognition of the Luxembourg legal framework and would certainly give comfort to, among others, other European bodies that have their headquarters in Luxembourg to follow this call to overcome the choice of foreign laws for the issue of debt instruments.

The granting of loans is, in principle, a regulated activity, the performance of which requires the holding of a licence from the Commission de Surveillance du Secteur Financier (CSSF), as further detailed in 2.1 Authorisation to Provide Financing to a Company.

Despite the above, and as the main domicile for non-bank financial institutions in Europe and thanks to a booming alternative finance industry, the Luxembourg loan market continues to see a strong growth of alternative credit providers (such as securitisation vehicles and regulated or alternative investment funds) benefiting from exemptions to licensing requirements (see 2.1 Authorisation to Provide Financing to a Company for the scope of exemptions).

See 5.4 Restrictions on Target on the recent change of the Law of 10 August 1915 on companies, as amended (the "Companies Law") following adoption of draft bill No 7791.

Below are the main recent legislative initiatives both at the EU and national level that are likely to affect the credit market in Luxembourg.

Professional Payment Guarantee Law

The Law of 17 July 2020 on professional payment guarantee (the "PPG Law") introduces a new legal form of guarantee. According to Luxembourg law, the typical manner of providing a guarantee is through a suretyship (cautionnement). Through this contract, an accessory obligation is created, the existence and enforceability of which depends on the status of the underlying guaranteed obligation.

Another form of guarantee, which is not statutorily established under Luxembourg law, is the first-demand guarantee. The latter creates an obligation to the guarantor that is independent from the underlying secured obligation. The issue with the first-demand guarantee is that it faces the risk of being recharacterised as a suretyship by the Luxembourg courts, which will undermine the rights of the secured creditor. The PPG Law introduces an optional (opt-in) contractual guarantee regime that allows the parties to structure their contract by combining features of the existing guarantee types, without them facing the risk of recharacterisation. More specifically, unless otherwise agreed by the parties, the professional payment guarantee can be enforced irrespective of the default of the underlying obligation. In that sense, the guarantor cannot raise any defence related to the underlying obligation to the creditor. On top of that, the putative insolvency of the debtor or the commencement of a reorganisation plan will not affect the obligations of the guarantor. At the same time, unless otherwise agreed, the guarantor will be subrogated to the rights and obligations of the creditor, after the repayment of the guarantee.

Finally, under the PPG Law, it is possible to grant a guarantee in favour of an intermediary that acts for the benefit of the creditor. The application of the PPG Law requires that the guarantor provides guarantees on a professional basis, that the parties explicitly opt in to the PPG Law and that the agreement is evidenced in writing.

Blockchain Laws

The Luxembourg legislator has also taken significant initiatives in the direction of incorporating fintech-related technological innovations into the Luxembourg legal system. Two distinct laws passed in 2019 and 2021 allowed the use of new technologies in the issuance, holding and circulation of securities.

The Law of 1 March 2019 (the "Blockchain I Law") amended the Law of 1 August 2001, as amended, and allowed the use of innovative technological means for the holding and trading of securities. The Blockchain I Law introduced new concepts in the national legal system and established the foundations for the digitalisation of capital markets in Luxembourg. Most importantly, it acknowledged, for the first time, the issuance of security tokens, a crypto asset stored in a blockchain that represents the securities.

Subsequently, and in an attempt to extend the provisions that the Blockchain I Law introduced, the Law of 21 January 2021 (the "Blockchain II Law") was enacted, which amended the Law of 6 April 2013 on dematerialised securities, as amended, and the Luxembourg Law of 5 April 1993 on the financial sector, as amended (LFS). The Blockchain II Law extended the possibility to use secured electronic registration systems, such as distributed ledger technologies and databases, to the issuance of dematerialised securities.

Both the above legislative initiatives played a pivotal role in promoting the fintech legal market in Luxembourg and in providing legal certainty to financial market participants that are active in this discipline. By implementing the principle of digital neutrality, the legislator acknowledged not only the use of digital ledger technologies such as blockchain, but created an open-ended system enabling the smooth introduction of future technological developments in the securities market.

In parallel with the legislative initiatives, the CSSF, being the competent authority for monitoring the developments in the fintech sector, issued a warning regarding the risks linked to virtual currencies and highlighted that undertakings for collective investment funds, when offering services to retail investors (and pension funds in general), are not allowed to invest directly or indirectly in virtual currencies. It also has to be noted that following the entry into force of the Law of 25 March 2020 implementing the Fifth EU AML Directive and amending the AML/CFT Law, no virtual asset service provider may be established in Luxembourg without being registered with the CSSF.

Finally, on 24 September 2020, the European Commission published a proposal for a Regulation on Markets in Crypto-assets (the "MiCA Proposal"). The MiCA Proposal is part of a broader initiative – ie, the EU Digital Finance Package – which also encompasses a retail payment strategy aiming at enhancing the digitalisation of EU retail payments.

Draft Bill Amending the Securitisation Law

On 21 May 2021, draft bill No 7825 modernising the Law of 22 March 2004 on securitisation, as amended (the “Securitisation Law”), was submitted to the Luxembourg Parliament. The bill would further enhance the attractiveness of securitisations for investors and contains changes addressing requests from market participants that could be summarised as follows:

  • the refinancing of a securitisation transaction would no longer be limited to securities and would be extended to any financial instrument (allowing for the financing of securitisation undertakings by all types of loans); and
  • a certain flexibility would be provided to the corporate structuring of securitisation transactions, by widening the range of company forms that can be incorporated as a securitisation company; in particular, securitisation companies could, if the bill is passed, be incorporated in the form of a common limited partnership or a special limited partnership.

The draft bill also allows the active management of the underlying assets of a securitisation vehicle, with respect to CDOs/CLOs provided the securities issued by the securitisation vehicle are offered in connection with private placement. This novelty will make Luxembourg attractive for the issuance of CLOs and CDOs. Finally, but among others, the draft bill establishes the requirements under which a securitisation vehicle needs to be authorised by the CSSF, by clarifying the condition under which an SPV is deemed to issue securities to the public on a continuous basis.

CSSF Q&A on the Statuses of “PFS”

On 21 June 2021, the CSSF published its questions and answers on the statuses of professionals of the financial sector (PFS) (Q&A), wherein it, among others, clarifies the meaning of the granting of loans to the “public”. On the basis of the Q&A, the pursuit of the following lending activities could be made without triggering any authorisation requirements (see 2.1 Authorisation to Provide Financing to a Company for the scope of lending activities requiring a prior authorisation of the CSSF):

  • one-off lending operations;
  • intra-group lending;
  • loans granted to a limited circle of previously determined persons; and
  • loans granted by persons that refinance themselves through securitisation operations.

Recent Tax Developments

From a tax perspective, the implementation of the Anti-Tax Avoidance Directives, ATAD 1 and ATAD 2, into Luxembourg domestic law had a significant impact on the Luxembourg loan market and especially on the repackaging of debts. ATAD 1 and ATAD 2 introduced a set of minimum standard rules to combat harmful tax practices; in particular, the interest deduction limitation rule and the anti-hybrid mismatch rules. From a practical perspective, the rules provided by the ATADs triggered complex tax structuring to be able to ensure tax neutrality for financing transactions. For instance, securitisation transactions are now to be carefully analysed and monitored in order to assess and ensure their continuing tax neutrality.

The Luxembourg tax authorities issued a circular on 8 January 2021 in order to provide more guidance on the practical implementation of the interest deduction limitation rule provided for by ATAD 1.

In line with the growing global demand for sustainable finance following the COP 21 agreement and the ratification of the UN Sustainable Development Goals, sustainable finance has gained a significant role in the Luxembourg financial sector, which is a leading international hub for sustainable finance.

It is worth noting that the world's first legal framework for green covered bonds was established in Luxembourg in 2018 and is expected to play a pivotal role in promoting the funding of ESG-compliant projects.

Initiatives taken at the level of the European Union, such as the EU Action Plan on sustainable finance, have created a certain number of regulatory standards for professionals in the finance industry (notably, the ESG disclosure requirements deriving from Regulation (EU) 2019/2088 and Regulation (EU) 2020/852), applying also to Luxembourg market players.

With regard to local initiatives, the Luxembourg government, in co-operation with the private sector, founded in 2020 the Luxembourg Sustainable Finance Initiative (LSFI). Its main aspirations are to promote existing and upcoming sustainable finance initiatives, to co-ordinate and support the Luxembourg financial centre in taking impactful actions in the field of sustainable finance and to measure the progress that is made in this sector by collecting and analysing data on the Luxembourg financial industry in order to follow its progress in integrating sustainability. Through this initiative, the Luxembourg government has sent yet another strong signal of the county’s determination to help mainstream sustainable finance.

Furthermore, Luxembourg was the first European country to launch a sustainability bond framework in September 2020. This framework, which meets the highest market standards, was also the first in the world to fully comply with the new recommendations of the European taxonomy for green financing. Following the establishment of the sustainability bond framework, Luxembourg has successfully issued its first sovereign sustainability bond, for an amount of EUR1.5 billion, with a 12-year maturity and bearing a negative interest rate of -0.123%. The bonds have been listed on the Luxembourg Green Exchange, the world’s first dedicated and leading platform for green, social and sustainable securities, which was launched in 2016. The Luxembourg Green Exchange has the largest market share of listed green bonds worldwide.

According to the LFS, any person granting loans in Luxembourg on a professional basis must hold a licence of a credit institution or a professional in the financial sector carrying on lending activities.

Pursuant to Article 28-4 of the LFS, a professional granting loans to the public for their own account (ie, credit institutions) and professionals of the financial sector performing lending operations (such as financial leasing and factoring operations) fall under the scope of the licence requirements.

The granting of loans could be an activity exempted from licensing requirements, in so far as, among others, loans are not granted to the public (see also 1.1 Impact of Regulatory Environment and Economic Cycles on the exemptions for licensing requirements set forth in the Q&A).

Entities contemplating carrying on lending activities in Luxembourg should satisfy a certain number of legal requirements as set out in the LFS.

Since November 2014, the ECB has been exclusively competent for the authorisation and qualifying holding approvals of all credit institutions (except for branches of a third-country-based entity), while the authorisation of non-bank entities as well as branches of a third-country-based entity seeking to provide loans in Luxembourg remains within the scope of the CSSF’s competences.

Furthermore, the CSSF closely monitors lending activities given that such activities continue to develop outside traditional banking circuits. Hence, lenders contemplating undertaking lending activities in Luxembourg should approach the CSSF by submitting a detailed description of the envisaged activities and obtain clearance from the CSSF.

As indicated in 2.1 Authorisation to Provide Financing to a Company, the granting of loans is, in principle, a regulated activity in Luxembourg that could be provided by duly licensed credit institutions or non-bank entities.

Lenders based within the European Union could grant loans in Luxembourg through the provision of cross-border services, the establishment of a branch or the appointment of a tied agent, provided that they hold an authorisation from the competent authority of their home member state to perform lending activities.

Lenders based in a third country could only grant loans in Luxembourg through the establishment of a branch. Such branch shall be subject to the same authorisation rules as those applying to credit institutions and other professionals governed by the LFS. Furthermore, third-country-based lenders wishing to grant loans without having an establishment in Luxembourg but that occasionally and temporarily come to Luxembourg in order to, among others, collect deposits and other repayable funds from the public and provide any other regulated service under the LFS are also subject to prior authorisation from the CSSF. However, the CSSF clarified in its Q&A that going to Luxembourg temporarily to carry out an upstream or downstream activity from the above-mentioned activities is not subject to authorisation.

See 3.1 Restrictions on Foreign Lenders Granting Loans on restrictions on foreign lenders granting loans. Provided that the foreign lender lawfully grants loans in Luxembourg, there are no specific restrictions relating to the granting of security to secure such loan, to the extent that the security is constituted on a type of asset over which security can be granted.

CSSF Circular No 12-538 on lending in foreign currency provides for specific conditions to be observed by credit institutions and professionals performing lending activities when providing loans in a foreign currency.

Unless otherwise agreed between the borrower and lender, and save for the financing of criminal activities, there are no specific restrictions related to the use of proceeds arising out of a loan or debt instruments.

The concepts of agent and agency (mandat) are governed by the Luxembourg Civil Code.

The Luxembourg Law of 22 March 2004 on securitisation undertakings, as amended (the "Securitisation Law"), provides for a specific legal framework applying to agents in charge of representing investors’ interests. It expressly allows the granting of security interests and guarantees to a (security) agent without the need to use parallel debt provisions in the relevant documentation. The rights and obligations of such agent should be assessed on the basis of the Civil Code provisions governing the agency.

Furthermore, under the Law of 27 July 2003 on trusts and fiduciary agreements, as amended (the “Fiduciary Law”), foreign trusts are recognised in Luxembourg to the extent that they are authorised by the law of the jurisdiction in which they are created.

According to the Fiduciary Law, a Luxembourg fiduciary may enter into a fiduciary agreement with a fiduciant, pursuant to which the fiduciary becomes the owner of a certain pool of assets forming the fiduciary estate, which are, even in an insolvency scenario, segregated from the assets of the fiduciary and held off balance sheet.

Under Luxembourg law, a loan (receivables) can be transferred by the lender through an assignment, subrogation or novation.

Assignment of Receivables

All rights and obligations on the receivables may be assigned by a lender to an assignee pursuant to Articles 1689 et seq of the Luxembourg Civil Code. The assignee will therefore become the legal owner of the receivables so transferred. Such transfer of the receivable should be then notified to the debtor in accordance with Article 1690 of the Luxembourg Civil Code.

Subrogation

Pursuant to Articles 1249 et seq of the Luxembourg Civil Code, receivables may also be transferred by way of contractual subrogation; ie, a third party will pay to the original lender the amount owed by the debtor and will then be subrogated to all rights and actions the original creditor could have exercised against the debtor prior to the payment by the third party.

Novation

Also, pursuant to Articles 1271 et seq of the Luxembourg Civil Code, receivables may be transferred by way of novation; ie, all parties must consent that a new lender will substitute the original lender and assume its obligations under a new agreement made between the new lender and the debtor.

However, pursuant to Article 1278 of the Luxembourg Civil Code, any security interests (such as privileges or mortgages) attached to a former (extinct) claim lapse by virtue of the novation unless the lender has explicitly reserved them to subsist. In addition, following the general rule provided by Article 1692 of the Luxembourg Civil Code, which applies to accessory security in Luxembourg, the transfer or assignment of receivables includes the transfer of its accessory rights, including any security interests (such as privileges or mortgages).

Should the instrument being bought back be a debt instrument listed on a European Union regulated market or a multilateral trading facility, the provisions of, respectively, Regulation (EU) No 596/2014 on market abuse (ie, an assessment should be made on whether such buy-back would constitute price-sensitive information that is likely to be considered as inside information) and rules of the relevant securities exchange on which such debt instrument is listed (if any, such as ensuring equal treatment among bondholders as far as the rights attaching to debt securities held by the latter are concerned) should be observed. Save for the above and unless otherwise contractually agreed between the parties, there are no restrictions applicable to debt buy-backs in Luxembourg.

The Luxembourg legal framework as regards public finance transactions derive from the provisions of the Law of 19 May 2006 on takeover bids, as amended (the “Takeover Bids Law”), transposing Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 (the “Takeover Bids Directive”).

The CSSF is the competent authority for supervising takeover bids, provided that the offeree has its registered office in Luxembourg and its securities are publicly traded in a regulated market in Luxembourg.

The procedure to observe while making a public takeover bid derives from the rules set forth in the Takeover Bids Directive and is rather standard throughout the European Union. In a nutshell, the offeror must inform the CSSF of its intention to make a public takeover bid, before disclosing such decision to the public. Subsequently, the offeror must draw up and make public an offer document that will provide information on the takeover offer to the holders of the target company. Such document shall also be communicated to the CSSF for approval within ten working days from the day on which the bid was made public.

Subject to the Law of 23 December 2005 (the "Relibi Law"), as a matter of principle, there is no withholding tax in Luxembourg on payments of principal, interest or other sums made by a borrower to a lender (unless such payment of principal and interest are not at arm’s length). As a consequence, payment obligations of borrowers to lenders would be made free of any withholding tax.

However, as per the Relibi Law, payments of interest or similar income made, or ascribed, by a paying agent established in Luxembourg to, or for the benefit of, a Luxembourg resident individual lender will be subject to a withholding tax of 20%.

If the individual lender acts in the course of the management of their private wealth, the aforementioned 20% withholding tax will operate a full discharge of income tax due on such payments.

No other taxes, duties, charges or tax considerations are imposed on lenders while making or transferring loans to, or taking security or guarantees from, debtors based in Luxembourg, save that the registration of the loan/security/guarantee documentation will be required where such documentation is physically attached to a public deed or to any other document subject to a mandatory registration in Luxembourg. Furthermore, should the taking of security imply the transfer of rights on immovable property located in Luxembourg or aircraft or boats registered in Luxembourg, such transfers would be subject to an ad valorem registration duty.

In principle, the interest rate may be freely determined between the parties to a loan agreement and may exceed the legal interest rate. However, if the interest rate is manifestly usury, a Luxembourg court may reduce it to the applicable legal interest rate. In addition, if the borrower is a consumer, information must be provided regarding the effective annual global interest rate (taux annuel effectif global) and on the interest amount charged for each instalment of the loan.

Under Luxembourg law, credit support can take various forms, from the most traditional forms of contractual undertakings pertaining to civil contract law to a highly lender-friendly financial collateral regime.

Security Governed by the Collateral Law

The Law of 5 August 2005 on financial collateral arrangements, as amended (the "Collateral Law"), provides for various techniques to grant security in guarantee for financial debts; namely, pledges, transfers of title for security purposes (including by way of fiduciary transfer) and repurchase agreements. The collateral under these arrangements can take the form of any “financial instruments and claims”. A variety of assets may consequently be used as financial collateral. Typical collateral will take the form of shares of a company, bonds, intercompany receivables, bank accounts and securities accounts, without prejudice to more peculiar sorts of collateral such as insurance receivables and the capital calls and commitments of the investors in a fund.

Security Governed by the Civil Code and Special Laws

The in rem securities under civil law may also be granted, such as commercial pledges, inventory pledges and mortgages over real estate properties. Other types of securities – such as (i) mortgages over aircraft, governed by the law of 29 March 1978, and (ii) a general pledge over ongoing business concerns governed by the Grand Ducal decree of 27 May 1937, as amended (the "1937 GDD") – are also available under Luxembourg law.

The Civil Code provides an entire regime for suretyships (cautionnements), but also recognises the enforceability of other personal securities, such as autonomous guarantees, comfort letters and other sui generis personal undertakings. In addition, the Professional Guarantee Law introduced a new form of flexible professional payment guarantee, which may be adapted to the specific transaction, with the provisions agreed by the parties receiving full recognition under Luxembourg law, without risk of recharacterisation.

Formalities and Perfection Requirements for a Security Governed by the Collateral Law

Pledges over financial instruments and claims require that the pledgor must be dispossessed with respect to the pledged assets, which is typically achieved as follows.

  • Through a pledge over (i) the shares of a private limited liability company, by the mere conclusion of the pledge agreement between the pledgor and the pledgee in the presence of the company that issued the pledged shares and its registration in the shareholders’ register of the said company, and (ii) the shares of a public limited liability company following its registration in the shareholders’ register of the company that issued the pledged shares.
  • Through a pledge over a bank account, upon its notification or acceptance by the bank with which the pledged bank account is maintained. It is a prerequisite to the creation of the pledge over a bank account that the bank maintaining the pledged bank account accepts to waive its general rights of pledge, lien, set-off or retention in respect of the relevant bank account usually contained in the bank's general terms and conditions.
  • Through a pledge over receivables, upon the mere conclusion of the pledge agreement. However, the debtor of the pledged receivables will be discharged while making payments to the pledgor unless it has been notified of the existence of the pledge over the receivables to the benefit of the pledgee.

With respect to a transfer of title by way of security, the pledgee transfers the ownership in relation to the receivables to the beneficiary until the secured obligations have been discharged, triggering the obligation of the beneficiary to retransfer the receivables to the pledgor. The transfer of title by way of security will be perfected against the debtor and third parties upon its execution by the pledgor and the beneficiary. However, the debtor of the transferred receivables will be discharged while making payments to the pledgor unless the debtor has been notified of the existence of the transfer of title over the receivables to the benefit of the pledgee.

Security Governed by the Civil Code and Other Special Laws

The creation of a security right over immovable property or aircraft requires the realisation of a number of formal requirements. The security right can be created only through a notarial deed, which has to be registered with the tax administration and relevant publicly held mortgage register. Meeting those formalities is costly and might take time.

Equally formal and expensive is the creation of a security right over ongoing business concerns, which has to be witnessed in a written contract and registered in a mortgage registry. The collateral will comprise all the tangible and intangible assets of a business as well as half of its outstanding shares.

Guarantees

Guarantees and suretyships are perfected by the mere conclusion of the relevant agreement creating such security.

The creation of a floating charge interest over the assets of a company is not possible under Luxembourg law, pursuant to the Luxembourg law principle of prohibition to secure future or after-acquire assets. The Luxembourg law concept that is closest to a floating charge is the pledge over ongoing business concerns referred to in 5.1 Assets and Forms of Security.

In addition, the Collateral Law provides for the possibility to create securities over all financial instruments of a pledgor, even those that will be acquired in the future. Hence, it is common that borrowers grant to their lenders a security package comprising pledges on certain financial instruments and claims held by such borrowers and governed by the Collateral Law. The perfection of pledges will depend on the category of the collateral, as described in 5.1 Assets and Forms of Security.

Furthermore, under Luxembourg law, security interests with respect to future assets are, in principle, considered as a promise to pledge (promesse de gage), to deliver the future assets and to create in the future the security interest as long as the assets are not in possession of the pledgee of the third-party holder. As an exception to the Luxembourg law principle of prohibition to secure future or after-acquire assets, it is possible to agree (by way of contract) to pledge future or after-acquired assets once they have entered into the ownership of the pledgor and are transferred into the possession of the pledgee or a third-party holder pursuant to a pledge agreement.

As a general rule, all transactions of a company (including the provision of guarantees or security) must comply with the company’s corporate object as set forth in its articles of association and be in the interest of the company. The latter concept means that a company may not engage in transactions that, though lawful, are aimed at conferring exclusive or substantially exclusive benefits on a person other than the company itself.

This condition is generally met in the event that a company provides collateral to secure its own indebtedness. It is also clearly fulfilled in all instances where a company gives collateral to secure the indebtedness of third parties or other group companies in exchange for an arm’s-length consideration.

The above condition is also met if the company is providing an exclusive downstream guarantee since one would assume that such a guarantee is helpful for the subsidiary of the relevant company to obtain credit and that will enhance the business of the subsidiary, which, in turn, will result in an increased value of the shareholding of its parent company.

Finally, the condition is also met if the guarantor derives an indirect benefit such as the possibility to borrow, under favourable conditions from the bank taking the relevant security, or in cases where the secured loan (or part thereof) is on-lent by the other group company to the company providing the collateral. Guarantees to secure loans to other group companies or to the parent also meet the “corporate interest” condition if these guarantees are necessary for the continuing operations of the relevant company and if the guarantor heavily depends on those operations.

Upstream and Cross-Stream Guarantees

There is no Luxembourg legislation governing group companies that specifically regulates the organisation and liability of groups of companies. As a consequence, the concept of group interest as opposed to the interest of the individual corporate entity is not expressly recognised in Luxembourg. Hence, a company may, in principle, not encumber its assets or provide guarantees in favour of group companies in general (at least as far as parent companies and subsidiaries of its parent companies are concerned) unless the said Luxembourg company assists other group companies.

In practice, upstream or cross-stream guarantees are limited to a certain percentage of the guarantors' net assets.

If there is a finding by a court that financial assistance such as the giving of a guarantee is not showing a sufficient benefit to the company, its managers may be held liable for action taken in that context. Furthermore, under certain circumstances, the managers of the latter company may incur criminal penalties based on the concept of misappropriation of corporate assets (Article 1500-1 of the Luxembourg Companies Law). Ultimately, it cannot be excluded that if the relevant transaction were to be considered as a misappropriation by a Luxembourg court or if it could be evidenced that the other parties to the transactions were aware of the fact that the transaction was not for the company’s corporate benefit, the transaction might be declared void based on the concept of illegal cause (cause illicite).

As a general rule, companies that are an acquisition target are prohibited from financing the buyout of their shares. It is, though, possible for a public limited liability company, under certain conditions as provided for in the Companies Law, to directly or indirectly advance funds, grant loans or provide guarantees or security with a view to the acquisition of its own shares by a third party. If the requirements of the Companies Law are not met, the directors of the company may face civil or criminal liability.

While the Companies Law does not expressly provide for such prohibition for private limited liability companies, the reference to "corporate units" in the relevant provisions of the Companies Law prohibiting such financial assistance was, until recently, subject to uncertainty among practitioners.

The Luxembourg Parliament has recently adopted a bill (which entered into force on 16 August 2021) revising Article 1500-7 paragraph 2° of the Companies Law by removing references to "corporate units" and hence confirming that criminal sanctions provided under such article do not apply to managers of a private limited liability company. Financial assistance is therefore not prohibited for private limited liability companies.

There are no material restrictions save for those described in 5.2 Floating Charges or Other Universal or Similar Security Interests (notification formalities required for the perfection of pledges over receivables, bank accounts and the shares of a private limited liability company) and 5.3 Downstream, Upstream and Cross-Stream Guarantees.

A security, it being a pledge or a mortgage, is released once the secured obligation is fully discharged (Articles 2082 and 2180 of the Civil Code) or as provided for in the security agreement. Despite such explicit provision of the Civil Code and for the sake of good order, the parties of a security agreement usually sign a release agreement, which asserts that either the secured obligations under the security arrangement have been paid in full and that the collateral is to be released or the security taker consents to release the pledgor from its obligations under the collateral.

As a general principle, contractually secured creditors enjoy a privilege over the assets of the debtor that is restricted on the encumbered asset.

With respect to a security interest created pursuant to the Collateral Law, unless otherwise agreed, the first priority pledgee is entitled to receive any proceeds arising out of the enforcement of the security interest.

As regards a security interest (which creates a right in rem), priority of pledges is determined by the date on which they became enforceable against third parties; ie, on a first-to-file basis in the relevant register (eg, mortgage register, register of shareholders).

In practice, priority rules of competing creditors are usually contractually adapted through entering into an intercreditor agreement; for instance, between creditors that should provide and govern the subordination among creditors as per their respective rights over the security interest. Hence, in the case of enforcement of the security interest, lower-ranked creditors will be subordinated in rank, priority and enforcement to upper-ranked creditors, subject to the provisions of the intercreditor agreement, if any.

Even though there are no general Luxembourg law provisions on contractual subordination, there is evidence of limited Luxembourg case law supporting the validity of special subordination clauses against the bankruptcy receiver of an insolvent borrower.

A typical loan security package in Luxembourg includes security interests governed by the Collateral Law and guarantees, the enforcement of which could be made as follows.

Security Governed by the Collateral Law

The pledgee can, upon the occurrence of the contractual trigger event (which may be a default under the secured obligations) and without prior notice, inter alia:

  • appropriate the security or have it appropriated by a third party;
  • sell or cause the security to be sold in a private transaction under arm's-length conditions, by a public sale or by way of an auction;
  • request a court that title to the security be transferred to it as payment of the secured obligations;
  • appropriate the security at its market price if traded on a stock exchange or on a recognised regulated market open to the public and operating regularly; or
  • otherwise enforce the security in any other manner permitted by Luxembourg laws, including, if applicable, by requesting a set-off or direct payment.

Enforcement of Guarantees

Due to the independent nature of a guarantee, the calling of it could be made as contractually agreed between the parties (even in the absence of a default or the occurrence of the risk guaranteed). However, certain contractually agreed conditions might be observed by the beneficiary before proceeding to the calling of a guarantee.

Under Luxembourg laws, parties to an agreement can freely choose the law governing such agreement and submission to a foreign jurisdiction, subject to such choice not being abusive. Hence, the choice of foreign law as the governing law of the contract will – in accordance with, and subject to, the provisions of Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations – be recognised and upheld by Luxembourg courts, unless the chosen foreign law were not made bona fide and/or if:

  • the foreign law were not pleaded and proved; or
  • if pleaded and proved, such foreign law would be contrary to the mandatory rules of Luxembourg law or manifestly incompatible with Luxembourg international public policy.

The submission by the parties to the jurisdiction of foreign courts would be upheld by the Luxembourg courts, with the exceptions provided for in 6.3 A Judgment Given by a Foreign Court.

Judgment Given by a Foreign Court

A final and conclusive judgment rendered by the following courts would be enforced by Luxembourg courts without a retrial or re-examination of the matters thereby adjudicated, save for the examination of the compliance of such judgment with Luxembourg public order:

  • European Union-located courts, in accordance with applicable enforcement proceedings as provided for in Regulation (EU) No 1215/2012 (the “Brussels Regulation”); and
  • European Free Trade Association (EFTA)-located courts, in accordance with applicable enforcement proceedings as provided for in the Lugano convention of 30 October 2007 (the “Lugano Convention”).

A final and conclusive judgment rendered by the below-mentioned courts would be enforced by Luxembourg courts as follows:

  • England and Wales courts subject to (i) the provisions of the Convention of 30 June 2005 on choice of court agreements (the “Hague Convention”), (ii) the exequatur procedure as set out in Article 678 of the Luxembourg New Civil Procedure Code and (iii) established Luxembourg case law in respect of the enforcement of foreign law judgments; and
  • a non-EU- or non-EFTA-located court, subject to (i) the applicable exequatur procedure as set out in Article 678 of the Luxembourg New Civil Procedure Code and (ii) established Luxembourg case law in respect of the enforcement of foreign law judgments.

Arbitral Award

An arbitral award may be enforced in Luxembourg provided that all the requirements of the enforcement procedure set out in Articles 1250 and 1251 of the Luxembourg New Civil Procedure Code have been satisfied.

Other than those mentioned in 6.1 Enforcement of Collateral by Secured Lenders to 6.3 A Judgment Given by a Foreign Court, there are no other matters that might impact a foreign lender’s ability to enforce its rights under a loan or security agreement in Luxembourg.

Under Luxembourg law, the following types of reorganisation procedures outside of insolvency proceedings are available for a company, provided that its centre of main interests for the purpose of Regulation (EU) 2015/848 (the “Insolvency Regulation”) and central administration are located in Luxembourg.

Controlled Management

A company can apply for the regime of controlled management in the event that it loses its commercial creditworthiness or ceases to be in a position to fulfil its obligations, in order (i) to restructure its business or (ii) to realise its assets in good condition. An application for controlled management can only be made by the company itself. It requires that the company has not been declared bankrupt by the Luxembourg courts and is acting in good faith. Controlled management proceedings are rarely used as they are not often successful and generally lead to bankruptcy proceedings.

Preventative Composition Proceedings

A company may enter into preventative composition proceedings in order to resolve its financial difficulties by entering into an agreement with its creditors, the purpose of which is to avoid its bankruptcy.

Preventative composition proceedings may only be applied for by a company that is in financial difficulty. Similar to controlled management proceedings, the preventative composition proceedings are not available if the company has already been declared bankrupt by the Commercial District Court or if the company is acting in bad faith. The application for the preventative composition proceedings can only be made by the company and must be supported by proposals of preventative composition.

Reprieve from Payment Proceedings

A reprieve from payments of a commercial company can only be applied to a company that, because of extraordinary and unforeseeable events, has to temporarily cease its payments but that has, on the basis of its balance sheet, sufficient assets to pay all amounts due to its creditors. The reprieve from payments may also be granted if the situation of the applicant, even though showing a loss, presents serious elements of re-establishment of the balance between its assets and its debts.

The purpose of the reprieve from payments proceedings is to allow a business undertaking experiencing financial difficulties to suspend its payments for a limited time after a complex proceeding involving both the Commercial District Court and the Cour supérieure de justice and the approval by a majority of the creditors representing, by their claims, three quarters of the company’s debts (excluding claims secured by privilege, mortgage or pledge).

The suspension of payments is, however, not for general application. It only applies to those liabilities that have been assumed by the debtor prior to obtaining the suspension of payment and has no effect as far as taxes and other public charges or secured claims (by right of privilege, a mortgage or a pledge) are concerned.

The declaration of a Luxembourg company as insolvent results in the implementation of a moratorium/automatic stay that prevents all unsecured creditors of the insolvent company from taking any enforcement actions against the company’s assets. In that sense, common creditors are obliged to wait for the completion of the procedure and the allocation of the assets on a pari passu basis.

On the other hand, secured creditors and especially those benefiting from a security governed by the Collateral Law are exempted from the automatic stay (safe harbour) and, hence, can enforce their rights upon the occurrence of a trigger event (as contractually agreed between the parties), irrespective of any insolvency proceeding being initiated at the level of the collateral grantor.

Bankruptcy remoteness is an essential feature of the Collateral Law that further extends such insolvency safe harbour to financial collateral arrangements governed by laws other than those of Luxembourg, provided that the security provider is established in Luxembourg. To benefit from this additional safe harbour, the foreign-law-governed security agreements should be “similar” to the Collateral Law, with a similar scope of financial instruments and/or claims within the meaning of the Collateral Law.

The insolvency of the borrower does not have any impact on guarantees issued by third parties.

The order of priority payments on a company's insolvency is, pursuant to the Civil Code, as follows:

  • creditors of the bankrupt estate (including the court's and bankruptcy administrator's costs and fees);
  • preferred creditors;
  • ordinary unsecured creditors; and
  • shareholders, who are treated as subordinated creditors and receive any surplus from the liquidation, if any, in proportion to their shareholding.

If the company's assets are not sufficient to pay the preferred creditors with a general preferential right, the claims of these creditors take preference over the other creditors (including creditors with a special preferential right or with a mortgage).

Creditors benefiting from a security governed by the Collateral Law are out of the scope of the above-listed order, as further explained in 5.1 Assets and Forms of Security.

The concept of equitable subordination does not exist under Luxembourg law.

A lender might incur certain risks related to the recovering of its rights against a security provider or a guarantor becoming insolvent. The transaction with the (become insolvent) security provider or guarantor may be challenged by the appointed insolvency administrator. A conjectural cancellation could have one of the following legal consequences. If the transaction with the lender took place during the pre-bankruptcy suspect period (which is a period of six months and ten days preceding the opening of insolvency proceedings against the given security provider/guarantor), the court could, in theory, invalidate the transaction, if it is proved that the transaction took place while the parties were aware of the coming insolvency of the debtor. It is also possible that a creditor of the debtor might file an actio pauliana, to challenge transactions that took place prior to the insolvency, irrespective of the suspicious period, if the creditor can prove that it incurred damage, associated with the reduction of the estate of the insolvent debtor, and that the transaction took place in bad faith and on purpose to damage the creditor.

The above-mentioned risks do not affect security rights obtained under the provisions of the Collateral Law.

Project finance could be described as a technique for the design, financing, construction, management and exploitation of large infrastructure projects involving a promoter that sponsors and implements the financed project. The given project is typically financed through a legally and financially standalone project company (a special-purpose vehicle) with the promoter(s) being a strategic partner.

Generally speaking, there is no specific legal framework governing project finance in Luxembourg. A financing may, however, be subject to a specific legal regime depending on the industry to which a given financed project would belong. Despite the foregoing, the European Investment Bank (EIB) – being the biggest multilateral financial institution in the world and one of the largest providers of project finance, and having its headquarters in Luxembourg – and, more recently, the largest Chinese banks that set up their European hubs in Luxembourg mainly focus on private sector and vital infrastructure development around the world, with a solid track record of financing a variety of (infrastructure) projects focused on climate and the environment, development, innovation and skills, small and medium-sized businesses, infrastructure and cohesion.

The concept of public-private partnership (PPP) commonly refers to the use of private finance for infrastructure procurement and public service provision. Save for rules deriving from, among others, the Law of 8 April 2018 on public procurement, as amended, the Law of 3 July 2018 on concession contracts, building permits, environmental and health laws that should be taken into account in PPP transactions, there are neither specific rules nor restrictions applicable to PPPs in Luxembourg.

As a major financial centre, Luxembourg is used as a hub for many companies acting in a variety of industries across the globe. Most of the funding operations conducted through Luxembourg special-purpose vehicles are used for the financing of specific projects around the world.

See 4.2 Other Taxes, Duties, Charges or Tax Considerations on the absence of taxes and similar duties  in the context of project finance transactions in general. However, specific procedures apply to public procurement contracts, in which the bidder is required to submit a financial and technical plan in its proposal lodged within a set timeline, and on the basis of which the contracting (public) authority will select its preferred bidder. The format and content of tender documents are governed by the Law of 8 April 2018 on public procurement, as amended.

Luxembourg is an international financial centre with a financial services-oriented economy and has no fossil fuels (such as oil and gas) or mining industry. However – since 2017 and the adoption of the Law of 20 July 2017 on the exploration and use of space resources laying down the regulations for the authorisation and the supervision of private space exploration missions, including both exploration and utilisation of space resource – Luxembourg is the first European country, and the second worldwide, with a legal framework applicable to the exploration and use of space resources. The authorisation and supervision of space activities fall within the competences of the Ministry of the Economy and the Luxembourg Space Agency (powered by the Ministry of the Economy with the aim to, among others, implement the national space economic development strategy and policy).

The main issues that should be considered when structuring a deal would strongly depend on the nature of and potential risks associated with the financed project and the involved parties.

In Luxembourg, notwithstanding the particularities of the financed project, typical financing sources are through (i) credit facilities provided by credit institutions or (alternative credit providers) or (ii) the issuance of debt instruments to be placed with investors.

There are no specific restrictions on exporting natural resources; however, environmental, health and safety laws could impose burdens on the parties of a transaction.

Legal provisions concerning EHS issues are codified in the Luxembourg Environmental Code. Those fields are supervised by, respectively, the Ministry of the Environment, Climate and Sustainable Development (with respect to Environment-related matters) and the Ministry of Health (with respect to health and safety-related matters).

GSK Stockmann SA

44, Avenue John F. Kennedy
L-1855
Luxembourg

+352 271802 00

+352 271802 11

luxembourg@gsk-lux.com www.gsk-lux.com
Author Business Card

Trends and Developments


Authors



Maples Group advises global financial, institutional, business and private clients on the laws of the British Virgin Islands, the Cayman Islands, Ireland, Jersey and Luxembourg through its leading international law firm, Maples and Calder. With offices in key jurisdictions globally, the Maples Group has specific strengths in the areas of corporate commercial, finance, investment funds, litigation and trusts. Maintaining relationships with leading legal counsel, the Group leverages this local expertise to deliver an integrated service offering for global business initiatives. In Luxembourg, the independent law firm, Maples and Calder (Luxembourg) SARL, provides full-service legal advice on Luxembourg law with regard to corporate, finance, funds and investment management, tax and associated regulatory matters. The finance team acts as lead and local counsel for lenders, borrowers and international law firms on a wide range of domestic and cross-border debt financing, including corporate and leveraged finance, real estate finance and funds finance.

Current Perspective

While certain cross-border transactions were adversely affected by the pandemic (notably due to the disruption caused to industries such as aviation, hospitality, healthcare and retail) last year, 2021 has, to date, proven to be a very active year for the banking and finance practice.

The cross-border real estate finance market has been particularly dynamic, with many new transactions and old deals that had been put on hold picking up to completion. While the market has not fully recovered to the level preceding the crisis yet, new properties are emerging on the market, which suggests a new dynamism.

Fund finance

Fund finance has shown unprecedented levels of activity. 2020 had already been exceptional, but there has been a further 25% increase in deal volume. This includes technical amendments to existing facilities (upsizes, accessions of additional borrowers or guarantors, higher advance rates, extension of terms and adjustments to LIBOR related provisions),sponsors launching new funds to seize the opportunities arising from the unprecedented circumstances and putting in place bridge facility arrangements. The UK and North American institutional lenders remain keen to respond to funds’ demand for traditional bridge financing arrangements. More and more net asset value (NAV) or hybrid financing arrangements are being seen, an option where higher advance rates may not be borne or as means to provide long term financing facilities that shall remain available throughout the entire life cycle of the funds, regardless of whether there remain unfunded capital commitments to be drawn down.

Alternative lenders have continued to step in to largely negate the prospect of higher pricing and fund sourcing issues (due to regulatory thresholds). Already, 2021 has seen a surge of ESG-linked subscription credit facilities governed by New York or English law.

The remainder of 2021

The outlook for the remaining months of 2021 and the year to come is very positive and Luxembourg lawmakers have been proactive in drafting new laws and regulations (a number of which will be addressed later on in this article) to prepare and adapt the financial centre and to seize new opportunities.

Inspiring Perspectives for the Securitisation Practice

In the securitisation market, 2021 has likewise, proved to be very dynamic, a continuation of the impressive volumes seen during Q3 and Q4 of 2020.

Implementation of regulations

On the regulatory front, further progress was made to clarify the implementation of Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific structure for simple, transparent and standardised Securitisation (the EU Regulation on Securitisation). Firstly, on 25 March 2021 the EBA, ESMA and the EIOPA (European Insurance and Occupational Pensions Authority) jointly published an opinion to the Commission on the jurisdictional scope of application of the STSR.

This opinion is particularly interesting in post-Brexit Europe, as it clarifies the position of regulators with respect to the risk-retention, due diligence and transparency obligations of non-EU parties, which participate in a securitisation transaction subject to the STSR. While this instrument is not binding, it provides valuable insight on how the relevant regulators approach the questions treated therein.

A day later, on 26 March 2021, the same authorities published a Q&A which, amongst other topics addressed therein, confirms that underlying exposure-level documents (such as term sheets, final terms, prospectuses, facility agreements, intercreditor agreements, mezzanine documents and hedging documents) must be made available pursuant to Article 7 of the EU Regulation on Securitisation only to the extent it is “essential for the understanding of the transaction”. The Q&A provides helpful insight by stating that in most securitisation transactions, it is not essential to make the underlying documentation available in order to understand the transaction, but that there would likely be a need to make documentation available in the context of commercial mortgage-backed securities with only a few underlying exposures. On 28 May 2021, ESMA published a further update to its Q&A clarifying technical and practical issues.

Securitisation transactions

A trend which initiated in late 2020 and has continued into 2021 is the strong flow of securitisation transactions originating out of the US, Asian, Middle East and/or Latin American markets. These transactions which were, in the past structured through foreign jurisdictions are now being implemented through Luxembourg because of new constraints (such as diversified payment rights securitisations or REPO transactions) in originators’ or lenders’ jurisdictions.

These deals, where the parties are seeking to replicate, to the widest extent possible, the agreements, arrangements and structures that were previously used in (foreign) jurisdictions, may sometimes be challenging to implement in Luxembourg, and therefore require careful consideration regarding restrictions and limitations that are specific to the securitisation regime under the Luxembourg law of 22 March 2004 on securitisation, as amended (the "Securitisation Law"). These restrictions and limitations constitute a significant proportion of the subject matter of a draft law that aims at increasing the attractiveness of the Luxembourg securitisation regime.

Amendments to the Securitisation Law

On 21 May 2021, the long-awaited draft law 7825 amending the Securitisation Law (the “Draft Law on Securitisation”) was lodged at the Luxembourg Parliament. The amendments contained in the draft, whether aimed at enhancing legal certainty or strengthening the flexibility of the Luxembourg securitisation regime are very ambitious and address a number of issues that have been generating legal discussions over the last 15 years. The legislative process is still in its early stages and many changes may be made before the amendments are adopted. However, a number of the contemplated amendments are expected to increase tremendously the attractiveness of the financial centre as a European hub for securitisations.

One of the main changes alleviates the conditions pertaining to the means of funding and financing for Luxembourg Securitisation Vehicles (SVs). As a matter of principle, SVs established under the Securitisation Law must finance their operations primarily through the issuance of securities (in practice, through the issuance of notes, preferential shares or units, but also derivative instruments). Additionally, they may also seek leverage by way of loans that do not qualify as securities:

  • on a transitional basis (for warehousing and bridging purposes between the acquisition of the assets and the issuance of securities – prudent market practice suggests that a securitisation transaction may be entirely loan-financed at the beginning of the transaction for a period of time not exceeding 18 months); and/or
  • on the basis that any lasting loan financing would not account for more than one third of the total financing.

The Draft Law on Securitisation removes these restrictions and authorises SVs to be entirely financed through borrowings.

Another existing limitation under the Securitisation Law is that, irrespective of whether the management has been delegated by the SV, the management must at all times be limited to a passive, prudent man management of the securitised risks and the administration of financial flows linked to the securitisation operation itself. Under no circumstance may the activity of an SV amount to an economic activity that would re-qualify the SV as an entrepreneur. The Draft Law on Securitisation authorises the active management of securitised debt portfolio to the extent that it is not offered to the public. The elimination of this limitation means that Luxembourg will now offer an efficient legal framework for actively managed collateralised loan obligations (CLOs) and collateralised debt obligations.

Collateralised obligations

CLOs have been in existence since the late 1980s and constitute a form of securitisation of debt obligations (senior loans or bonds, unsecured senior or mezzanine obligations, etc). The vast majority (approximately 85%) of CLOs are issued in the USA. Despite the negative effects of the pandemic in 2020, the new issuance level for CLOs in Europe was EUR22.11 billion from 43 deals and 2021 has, so far seen strong volumes of new European issuances of CLOs continue in addition to the resets and refinancings. Additionally a recent trend, the introduction of loan tranches has been adopted from the US market and continues to gain ground. Since the post financial crisis resurgence of European CLOs in 2013, Ireland has become issuers’ jurisdiction of choice. Since 2020, all European CLOs are established in Ireland following the migration of nearly all existing Dutch CLO transactions (over 70) in Q4 2020.

The changes contemplated by the Draft Law on Securitisation may be reasonably expected to attract some of the transactions that were previously structured either through other European jurisdictions or issued in the US but structured through offshore jurisdictions, making Luxembourg one of the preferred jurisdictions for European CLOs.

When putting in place Luxembourg securitisation deals that used to be structured through foreign jurisdictions, another limitation that at times leads to some controversy is the limitation relating to the granting of security interests and guarantees.

According to Article 61(3) of the Securitisation Law, SVs are not allowed to grant security over their assets to third parties to the securitisation transaction, unless such security is granted to the SV’s investors or for the purpose of securing the obligations subscribed in connection with the securitisation of those same assets. This sometimes goes against the expectations of third-party creditors extending loans to the SV and expecting to take security over the SV’s assets. The Draft Law on Securitisation grants some flexibility in this respect by expressly authorising the SV to grant security interests to a wider scope of beneficiaries, ie, any creditor, be it direct or indirect, to the securitisation transaction, and any reference to the current sanctions applicable in case of the granting of a security interest in breach of the rules currently set forth in the Securitisation Law will be removed.

Future amendments

A few other amendments and changes are contemplated, such as enlarging the panel of options for legal forms available to SVs, and in particular the inclusion of partnerships (general corporate partnerships (sociétés en nom collectif), simple limited partnerships (sociétés en commandite simple), simplified joint stock companies (sociétés par actions simplifiées) and special limited partnerships (sociétés en commandite spécial)), clarifications on the legal subordination by including express rules in the law, refining the definition of issuance of securities to the public as per the Luxembourg Supervisory Authority, the Commission de Surveillance du Secteur Financier (CSSF) recommendations or clarifying the treatment and distribution of profits and losses of equity-financed compartments or reducing ambiguity of omissions regarding the registration of securitisation funds.

As anticipated last year, heightened interest was shown in securitisation funds, as tax-transparent structures are exempt from the interest limitation rules under ATAD, which confirmed the actual trend in favour of securitisation funds in the form of fiduciary estates. The law of 27 July 2003 on trust and fiduciary contracts (Fiduciary Law) allows the issuance of notes on a fiduciary basis in the name of the securitisation vehicle but for the benefit of the noteholders. It is believed that this trend will continue until hearing back from the European Commission following Luxembourg’s response to their letter of formal notice issued on 14 March 2020, whereby the Commission requested Luxembourg to amend its ATAD I law so as to exclude SSPEs, ie, securitisation vehicles that are subject to the EU Regulation on Securitisation, from the list of interest limitation rule exempted entities.

Financial Assistance

The latest and major Luxembourg legal updates while preparing this overview are the new law adopted on 16 August 2021 amending the law of 10 August 1915 on commercial companies (the “Law on Commercial Companies”) and the provision of long-awaited clarification on the scope of the prohibition of financial assistance.

The Law on Commercial Companies

According to Article 430-19 of the Law on Commercial Companies, “a company may not directly or indirectly, advance funds or make loans or provide security with a view to the acquisition of its shares by a third party” except under stringent conditions expressly set out in the Law on Commercial Companies. From a practical perspective, the issue is encountered from time to time in the context of acquisition finance transactions as this would prevent a target subsidiary whose shares have been acquired to guarantee or grant a security interest to secure the obligations subscribed by the acquiring parent or its affiliates to fund the purchase price.

The obligations pertaining to the amounts corresponding to the purchase price of the shares in the target entity need to be carved out of the scope of the repayment obligations guaranteed by such target entity in any guarantee or security interest granted by it. Criminal penalties are provided for in the Law on Commercial Companies at Article 1500-7 2° and apply to any person acting in the capacity of director or manager of a company who knowingly granted advances, loans or sureties in violation of the financial assistance rules.

Article 430-19 is part of the legal provisions applicable to société anonymes (public limited liability companies), sociétés européennes (European companies) and sociétés en commandite par actions (corporate partnerships limited by shares). Absent any similar provision in the section dedicated to sociétés à responsabilité limitée (private limited liability companies or SARLs), there used to be a consensus among the vast majority of professionals in Luxembourg that the prohibition was not applicable to such legal form.

Amendments to increase flexibility

On 16 August 2021, the Law on Commercial Companies was amended to modernise the Law on Commercial Companies, further increasing the flexibility it offers. During the legislative process, it was originally considered whether to extend the rules on financial assistance to SARL. While the concept of "shares" is often being used in English to refer to the equity ownership interests issued by SARL or SA, the concepts are differentiated under Luxembourg law as drafted in French between “actions” for SA and “parts sociales” for SARL (which could be translated into “corporate units” instead).

Hence, in order to implement the originally contemplated extension of the prohibition to SARL, one of the amendments that needed to be made to the Law on Commercial Companies was to add a reference to “parts sociales” in the relevant provisions (as well as an express reference to société anonymes which became supererogatory). The proposal to extent the prohibition to SARL was later set aside, but due to an oversight, the added reference to parts sociales remained in the amended version of Article 1500-7 2°.

Financial assistance rules

While the majority of professionals on the market nevertheless considered that financial assistance rules remained applicable to SA and SCA only, a minority took the opposite view as a result of the retention of the reference to parts sociales. This resulted in different views and a level of uncertainty which could not be easily resolved absent conclusive case law on the matter. In some cases, abiding by a conservative approach, certain transactions were consequently structured through foreign jurisdictions.

The clarification made by the law of 16 August 2021 whereby the erroneous reference to “parts sociales” was removed from Article 1500-7 2° has therefore been welcomed in the market. While the concerns relating to financial assistance are now eliminated, attention should still be paid to ensuring that any support granted by a SARL in the context of such transactions is within its corporate interest. The amendment may be expected to strengthen the popularity of the financial centre as a hub to structure cross-border financing transactions combined with the reliability of the creditor friendly regime of sureties (in particular, financial collateral arrangements and professional guarantees of payment), and the continued use of SARL as a flexible, inexpensive and adaptive legal form for special purpose vehicles and holding companies.

Blockchain

On 21 January 2021 and as foreseen in last year’s overview where insight was given on the related draft law, Luxembourg’s Parliament adopted a law supplementing the Luxembourg law of 6 April 2013 on dematerialised securities, confirming that securities (whether listed or unlisted) may be issued and recorded via secure electronic registration mechanisms, including distributed ledger technology (DLT or the “Blockchain Law”). The validity of transfers of securities executed through DLT has been recognised under Luxembourg law since the implementation of the law of 1 March 2019.

The Blockchain Law enables central account keepers or clearing systems to record securities via DLT on securities issuance accounts. An issuer still needs to resort to a central account keeper (a role that can be held by investment firms and credit institutions in respect of unlisted securities) or a clearing system to intermediate between it and the ultimate securities holders. The Blockchain Law is nonetheless an important step towards achieving the ultimate goal, ie, the effective reduction of intermediation.

Some market participants have already availed themselves of new possibilities offered by the Blockchain Law, with the issue earlier in the year of digital bonds on Ethereum public blockchain in particular, making headlines.

Expectations are that, within a few years, syndicated loans in the form of blockchain-based smart contracts will become commonplace. The limited formalism required for taking security under the Collateral Law makes Luxembourg pledge agreements relatively blockchain-compatible. It will only be a matter of time before security may be taken over shares registered on a DLT platform.

Crowdfunding

Luxembourg lawmakers have been anticipating the entry into force of Regulation (EU) 2020/1503 of 7 October 2020 on the European Crowdfunding service providers (ECSPs) for business (the “Regulation re crowdfunding”). A draft law was lodged with the Luxembourg Parliament on 21 May 2021. The draft law designates the CSSF as the competent authority to supervise ECSPs and to grant the necessary license to exercise the supervisory and investigation powers listed in the Regulation re crowdfunding and to impose administrative sanctions in case of violation. Investors will therefore be able to benefit from an adequate level of protection as from the date the Regulation becomes applicable.

Liberalisation of the Covered Bonds Market

Under the current regime, the issue of covered bonds is restricted to credit institutions to which specific authorisations have been granted, ie, covered bonds banks, or banques d’émissions de lettres de gage. According to a draft law submitted to the Luxembourg Parliament on 7 May 2021, the purpose of which is to implement the EU Directive 2019/2162 of 27 November 2019 (the “Directive”) and the EU Regulation 2019/2160 (the “Regulation re covered bonds”).

According to the draft law, all credit institutions duly authorised in Luxembourg, regardless of whether they have received the specific licence dedicated to the issue of covered bonds will be able to issue covered bonds to the extent that the aggregate exposure of this activity (calculated on the dedicated asset pool) will not exceed 20% of their total commitments. Additional changes will be implemented to cover all features of the Directive and Regulation re covered bonds, including the introduction of European Covered Bonds and (high-quality) European Covered Bonds as new types of covered bonds.

Clarification on Loan Origination

Pursuant to the Luxembourg law on the financial sector of 5 April 1993, as amended, lending activities may in the absence of specific exemptions be performed by:

  • credit institutions; or
  • specialised professionals of the financial sector, but subject to obtaining authorisation and several stringent conditions to be met (including evidence showing the existence of a subscribed and fully paid-up share capital of no less than EUR730,000).

This would apply to any professionals engaging in the business of granting loans to the public for their own account. Unfortunately, there remains uncertainties, as the concept of public is not legally defined. On 15 June 2021, the CSSF updated its FAQs and clarified that:

  • it will not consider such condition as being met where:
    1. loans are granted to a limited number of previously determined persons – as opposed to a multitude of non-identifiable persons);
    2. the nominal value of the loan amount is at least EUR3 million; and
    3. loans are granted solely to professionals; and
  • the professional character of the lending activity will be met when performed repetitively (excluding one-off operations).

This will allow further legal certainty where loan origination operations are contemplated to be performed by market players under exceptional circumstances.

Modernisation of the Authorisation Regime for Entities of the Financial and Insurance Sector

On 30 July 2021, the Luxembourg law of 21 July 2021 modernising the authorisation regime for entities in the financial and insurance sector entered into force.

The law modernises the authorisation regime by directly transferring to the CSSF and the Commissariat aux Assurances the power to grant, refuse and withdraw the authorisation of entities subject to their respective supervision.

Hence, the authorisation for these entities is no longer granted by the Ministere des Finances, ie, the ministry responsible for the financial and insurance sectors, but solely by the relevant national supervision authority.

This change has been triggered by taking into consideration the legal and regulatory developments at the European Union level leading to an allocation of authorisation powers to competent national authorities responsible for prudential supervision in order to strengthen their roles.

To that end, a series of Luxembourg laws in relation to the financial sector have been amended, including the financial sector law dated 5 April 1993 (as amended), the CSSF law dated 23 December 1998 (as amended), the payment services law dated 10 November 2009 (as amended), the insurance sector law dated 7 December 2015 (as amended), the securitisation law dated 22 March 2004 (as amended) and the markets in financial instruments law dated 30 May 2018 (as amended).

The law provides for a transitory provision according to which already authorised entities continue to benefit from their existing ministerial authorisation.

Maples Group

12E, rue Guillaume Kroll
L-1882
Luxembourg

+352 28 55 12 00

+352 28 55 12 01

onlineenquiry@maples.com www.maples.com
Author Business Card

Law and Practice

Authors



GSK Stockmann is a leading independent European corporate law firm with over 200 professionals across offices in Germany and Luxembourg. GSK Stockmann is the law firm of choice for real estate and financial services. In addition, the firm has deep-rooted expertise in key sectors including funds, capital markets, public, mobility, energy and healthcare. For international transactions and projects, GSK Stockmann works together with selected reputable law firms abroad. In Luxembourg, GSK Stockmann is the trusted adviser of leading financial institutions, asset managers, private equity houses, insurance companies, corporates and fintech companies, with both a local and international reach. The firm’s lawyers advise domestic and international clients in relation to banking and finance, capital markets, corporate/M&A and private equity, investment funds, real estate, regulatory and insurance as well as tax. More about the firm: www.gsk-lux.com.

Trends and Development

Authors



Maples Group advises global financial, institutional, business and private clients on the laws of the British Virgin Islands, the Cayman Islands, Ireland, Jersey and Luxembourg through its leading international law firm, Maples and Calder. With offices in key jurisdictions globally, the Maples Group has specific strengths in the areas of corporate commercial, finance, investment funds, litigation and trusts. Maintaining relationships with leading legal counsel, the Group leverages this local expertise to deliver an integrated service offering for global business initiatives. In Luxembourg, the independent law firm, Maples and Calder (Luxembourg) SARL, provides full-service legal advice on Luxembourg law with regard to corporate, finance, funds and investment management, tax and associated regulatory matters. The finance team acts as lead and local counsel for lenders, borrowers and international law firms on a wide range of domestic and cross-border debt financing, including corporate and leveraged finance, real estate finance and funds finance.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.