Over the past 12 months, Luxembourg’s private credit market has shown resilience and moderate growth, despite facing challenges from global economic uncertainties and inflationary pressures. The steady economic environment, coupled with Luxembourg’s reputation as a financial hub, has supported ongoing credit activities, albeit with cautious investor sentiment. Recent surveys have estimated that Luxembourg’s private credit market has reached a remarkable valuation of EUR510 billion, resulting in a 21.5% increase between June and December 2023. Private debt consistently covers a wide array of sectors, notably infrastructure and transportation, energy and environment, chemicals, IT, telecoms, media and communications, and healthcare and life sciences.

In Luxembourg, the public debt markets, specifically broad-based syndicated loans and high-yield securities, have maintained a level of competition with the private credit market over the past six months. The comparatively low interest rates within the public markets have continued to attract certain borrowers seeking to refinance existing private credit arrangements, especially among larger enterprises capable of accessing these markets. Despite this, the appeal of private credit remains robust, largely due to its flexible terms and bespoke financing structures, which continue to attract mid-sized and smaller companies. Consequently, while there is some refinancing activity involving a shift to public debt products, it is not overwhelmingly predominant.

Private credit has been the preferred form of acquisition financing in Luxembourg for some time, including the last 12 months. Depending on market conditions, however, sponsors will look to the syndicated loan market for larger transactions.

The expansion of the private credit market in Luxembourg faces several challenges. Increased competition has made it harder to secure deals and achieve desired returns. Navigating new regulations can be complex and costly. Economic volatility, such as fluctuations in interest rates and inflation, can impact investment performance. Additionally, reduced liquidity has made it more difficult for funds to raise new capital.

In Luxembourg, junior and hybrid capital products are commonly provided by private credit providers, though they are not as prevalent as senior debt offerings. These products, which include mezzanine financing and preferred equity, are typically used by companies looking for more flexible capital structures or those involved in leveraged buyouts. The recent trend shows an increasing interest in hybrid instruments as borrowers seek alternatives to traditional financing to balance their capital structures, improve liquidity, or fund acquisitions. Investors are responding to this demand by offering tailored solutions that incorporate equity-like features, allowing for potential higher returns while accommodating varying risk appetites in the current economic climate.

Private credit providers are mostly focused on sponsor-led transactions, but there are a number of private credit funds which regularly transact with founder-owned companies and public companies.

Recurring revenue-based financing is provided by private credit providers in Luxembourg, typically in relatively small deals.

It is difficult to point to a typical size limit for private credit transactions in Luxembourg. The ability to take a large ticket will of course also depend on the fund’s available capital and/or the status of new fundraising. These limits and any challenges in new fundraising are, however, not Luxembourg specific as the vast majority of private credit providers which are active in Luxembourg are international funds. According to a recent survey, 45% of debt funds have AuM up to EUR100 million. Thirty-one percent of debt funds are mid-size funds – ie, those with a net asset value of EUR100 million to EUR500 million, a significant percentage increase over last year. Finally, large funds ranging from EUR1 billion to EUR5 billion represent 22%.

Luxembourg Regulators and Private Credit

Although the Luxembourg Financial Sector Supervisory Authority, Commission de Surveillance du Secteur Financier (CSSF) considers private credit activity to a limited extent in its guidance on the scope of the local licence requirements for professionals performing lending operations (please refer to 2.1 Licensing and Regulatory Approval), the CSSF generally awaits the forthcoming implementation of the European Directives AIFMD2 and CRDVI, but is not developing any initiatives in parallel.

AIFMD2

The current European Directive on Alternative Investment Fund Managers (AIFMD) requires fund managers to comply with a variety of prudential and conduct of business rules. These rules are general in nature and apply to business operations and dealings with investors generally. AIFMD also contains rules which are specific to investment techniques (such as leverage) and which are specific to certain asset classes (such as private equity) but are silent on loan origination. AIFMD has, however, been amended (to include loan origination among other matters) but such amendment is yet to be implemented across the European Union. AIFMD is referred to as AIFMD2 in its amended form.

AIFMD2 introduces a range of rules on loan origination. These include subject matters such as:

• implementing policies, procedures and processes for the granting of loans;
• implementing policies, procedures and processes for assessing credit risk;
• loan concentration of 20% of the fund’s capital (called and uncalled contributions) to a single borrower of a certain type;
• leverage restrictions (175% for open-ended funds and 300% for closed-ended funds); and
• prohibition to grant loans to the fund manager (or its staff) or to its delegates, to the fund’s depositary (or its delegates), or to group companies.

AIFMD2 is not going to impose any specific licensing requirements for fund managers which are already authorised. They may need to apply for a variation of permissions but will otherwise only need to ensure compliance with the new rules.

These new rules are in relation to the business operations of the fund. They will not give the fund any regulatory permissions to grant loans to specific types of borrowers. That is a different matter and AIFMD2 is therefore without prejudice to local rules on corporate and consumer lending, including license requirements (please refer to 2.1 Licensing and Regulatory Approval), which will continue to apply.

AIFMD2 must be implemented by 16 April 2026.

CRDVI

The current European Capital Requirements Directive (CRD) provides for a harmonised regime on banking business (including lending) across the European Union. CRD has, however been amended among other matters to include lending from outside of the European Union but the most recent amendments are yet to be implemented across the European Union. It is referred to as CRDVI in its amended form.

CRDVI introduces rules on lending by non-EU credit institutions (ie, banks) to European borrowers and will require such non-EU credit institutions to set up a branch office in the country of the borrower and obtain authorisation locally (exemptions are available). Other types of non-EU based lenders should remain unaffected provided they do not meet the materiality requirements of qualifying as a credit institution under CRDVI. Private credit funds should therefore not be affected in Luxembourg. CRDVI implementing legislation is, however, still to be published in Luxembourg.

The CRDVI provisions in relation to lending by third country credit institutions must be implemented by 11 January 2027.

Licence Requirements for Lending

The provision of lending services to the public in Luxembourg generally triggers a licence requirement as a professional performing lending operations, where such lending activity is carried out on a professional basis and the lender does not refinance itself by taking deposits or other repayable funds from the public (otherwise the activity would require a credit institution licence). This may also include credit funds purchasing loans, for example where the loans are subject to further drawdowns.

Depending on whether the lender is a Luxembourg or foreign entity, specific scope considerations apply in relation to the above licence requirement. For instance, an exemption may be available to both Luxembourg and foreign lenders where either loans are granted to a limited group of previously determined persons or (i) the nominal value of each loan amounts to EUR3 million at least and (ii) the loans are granted exclusively to professionals (within the meaning of the Luxembourg Consumer Code). Lending on a pure cross-border basis by foreign entities should normally not trigger a local licence requirement either.

Private credit funds are further regulated in the European Union under AIFMD. The rules that apply pursuant to AIFMD are, however, only in relation to the business operations of the fund manager and do not cover the extension of credit. Certain regulated Luxembourg undertakings for collective investment (which are subject to funds specific legislation) are generally excluded from the scope of Luxembourg financial sector law licensing requirements, including the above lending-related one.

In addition to the above, there are specific rules on consumer lending set out in the Luxembourg Consumer Code. Consumer lending is subject to a number of specific protective rules as well as a specific licensing requirement. An exemption from these rules is for instance available where each loan is granted for an amount higher than EUR75,000.

Taking Security Over Assets Located in Luxembourg

Taking security over assets which are located in Luxembourg is normally not subject to any specific local licensing or regulatory approval requirements.

The primary regulator for private credit activity in Luxembourg in relation to both consumer and corporate lending is the CSSF.

Foreign Equity Investments

There are no specific restrictions on foreign equity investment in private credit funds in Luxembourg. In 2023, the Luxembourg legislature adopted a law establishing a mechanism for the national screening of foreign direct investment likely to undermine security or public order for the purposes of implementing Regulation (EU) 2019/452, which foresees specific screening requirements where direct or indirect control in certain critical sectors is acquired. Private credit should normally not constitute such a critical sector, given that within the financial sector the law rather refers to central bank activities as well as exchange, payment and securities settlement infrastructures and systems. A case-by-case analysis is however recommended.

Foreign Debt Investments

Foreign investment taking place by way of loans to the private credit fund would normally only be subject to the leverage restrictions as they apply to the fund, rather than to specific restrictions on such investment.

There are no specific compliance and reporting requirements in Luxembourg for private credit providers. General reporting obligations may apply to Luxembourg entities though, including for instance the national balance of payments reporting to the Luxembourg Central Bank.

Regulated private credit providers are subject to the usual reporting requirements as these apply to investment funds and/or licensed professionals performing lending operations (but not subject to any standalone corporate lending reporting requirements).

There are no specific concerns on club lending by private credit providers, neither is this to the best of the authors’ knowledge a priority of the national competition authority in Luxembourg. However, club lending is subject to applicable EU and national antitrust rules and, accordingly, private credit providers should not use a club lending occasion for purposes of (tacit) collusion on other (competitively sensitive) matters.

Common Structures

The most common structures (disregarding any holdco financing or equity co-investments) are either a combination of senior term debt and a super senior revolving facility or a combination of senior term debt and super senior term and revolving facilities.

Revolving facilities

Revolving facilities are typically only provided by private credit providers for a certain bridge period.

Delayed draw facilities

Delayed draw facilities are common in Luxembourg and feature on the majority of deals. In first-out last-out (FOLO) structures the super senior lender or super senior lenders will often be allocated part of the delayed draw facility (which then is converted into a super senior delayed draw facility) alongside their participation in the drawn term debt (which is then converted into super senior drawn term debt).

Key documents are the term sheet, facilities agreement, intercreditor agreement and the collateral documents. Agreements are usually negotiated for individual transactions but often precedent documentation is used as a starting point.

FOLO

FOLO transactions are not uncommon in Luxembourg.

External Factors

Documentary terms for private credit transactions are not typically Luxembourg-specific and the drafting of private credit documentation in Luxembourg therefore changes with the international market.

There are no specific restrictions on foreign lenders in respect of providing private credit or taking security in addition to those already set out in 2. Regulatory Environment and 4. Tax Considerations.

There are no specific Luxembourg law restrictions on the use of proceeds from private credit transactions by a borrower. Financial assistance rules must be complied with in acquisition financings.

Whether debt buybacks by the borrower or sponsor are permitted will depend on the requirements of the private credit provider and sponsor precedent. A number of private credit providers require that the documentation does not permit debt buybacks. In any event, if debt buybacks are permitted, the documentation would cater for appropriate disenfranchisement.

There are no recent legal or commercial developments that have required major changes to legal documentation for private credit transactions and this is not Luxembourg specific in any event.

Please see 1.5 Junior and Hybrid Capital.

Payment in Kind

Junior or mezzanine financings usually provide for a PIK, allowing the borrower to capitalise interest or part of the interest for a period of time (which may or may not be limited), either at a premium or not.

Amortisation

There is usually a bullet repayment.

There are no specific concerns with call protection provisions as a matter of Luxembourg law and this is not Luxembourg specific.

Under Luxembourg law, no Luxembourg withholding tax should apply on interest payments on loans/debt instruments granted to Luxembourg borrowers provided that the loans/debt instruments (i) qualify as debt for Luxembourg tax purposes, (ii) are not profit-participating, and (iii) the interest rate adheres to the arm’s length standard.

According to the law of 21 December 2018, introducing the interest barrier rules into the Luxembourg legislation, the portion of interest expenses exceeding interest income (ie, the so-called “exceeding borrowing costs”) would be tax deductible up to the higher of (i) 30% of the adjusted EBITDA of the Luxembourg taxpayer, and (ii) EUR3 million. In this respect, a Luxembourg taxpayer receiving or recognising income in its tax return that does not qualify as interest or economically equivalent income (eg, taxable dividend, rental income and capital gains derived from a Luxembourg building) may potentially fall within the scope of these provisions.

According to the law of 19 December 2019 introducing ATAD 2 into the Luxembourg legislation, the tax deductibility of an expense incurred by a Luxembourg borrower may also be restricted if (i) such expenses result in a hybrid mismatch (which can notably be defined as a situation where, because of a difference in the legal characterisation of a financial instrument, a tax deductible expense is not included in the taxable base of the ultimate recipient/beneficiary), and (ii) (a) the ultimate recipient/beneficiary of the expense and the Luxembourg borrower are “Associated Enterprises” or (b) the ultimate recipient/beneficiary and the Luxembourg borrower have entered into a structured arrangement which entails this hybrid mismatch. The term “structured arrangement” is defined in the ATAD 2 law as an arrangement involving a hybrid mismatch where the mismatch outcome is priced into the terms of the arrangement or an arrangement that has been designed to produce a hybrid mismatch outcome, unless the taxpayer or an “Associated Enterprise” could not reasonably have been expected to be aware of the hybrid mismatch and did not share in the value of the tax benefit resulting from the hybrid mismatch. Furthermore, according to the ATAD 2 law, the interest of various parties may be aggregated to assess the “Associated Enterprise” thresholds, if they are considered as acting together. A hybrid mismatch would however not arise if the absence of taxation at the level of the recipient/beneficiary of the expense will in any case occur due to its own tax status (ie, the recipient/beneficiary is a tax-exempt vehicle).

“Associated Enterprise” means:

• any entity which is a part of the same consolidated group for financial accounting purposes;
• any entity in which the taxpayer has a significant influence in the management, or an entity that has a significant influence in the management of the taxpayer;
• any entity (including a partnership), resident or not, in which the taxpayer holds directly or indirectly a participation in terms of voting rights or capital ownership of at least 50%, or is entitled to receive at least 50% of that entity’s profit; or
• an individual, or any entity (including a partnership), resident or not, that holds directly or indirectly a participation in terms of voting rights or capital ownership in the taxpayer of at least 50%, or is entitled to receive at least 50% of the taxpayer’s profit. With respect to hybrid mismatches involving a hybrid financing instrument, the 50% threshold is replaced by a 25% threshold.

The Luxembourg Non-Cooperative Tax Jurisdictions Law of 10 February 2021, as amended, could possibly restrict the tax deduction capacity of Luxembourg taxpayers, when interest/royalties payments are made to an affiliated entity which is (i) the beneficial owner of the interest/royalties, (ii) a corporate entity, and (iii) resident in a country mentioned on the EU list of non-cooperative tax jurisdictions, unless these payments are linked to a transaction which reflects economic reality. The current EU list of non-cooperative tax jurisdictions includes American Samoa, Anguilla, Fiji, Guam, Palau, Panama, Russia, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu.

There are no particular Luxembourg tax incentives available for foreign private credit lenders.

There are no particular additional tax considerations necessary for non-bank lenders (other than the ones depicted under 4.2 Other Taxes, Duties, Charges or Tax Considerations and 4.3 Tax Concerns for Foreign Lenders).

Typical security consists of a pledge over shares and various types of receivables (bank accounts, intercompany loans, etc). Other than security over real estate, which requires a notarial deed, there are limited formalities that apply to taking security in Luxembourg and any applicable formalities are not particularly time-consuming. The perfection requirements are normally fulfilled upon closing or shortly thereafter. In Luxembourg, to perfect a pledge over shares, the pledge must either be registered in the company’s shareholders’ register or notified to the pledged company. For receivables, perfection is achieved by the execution of the pledge. Notification to the debtor makes the pledge enforceable against them. In the case of bank accounts, the pledge is perfected by notifying the bank where the account is held, and the bank’s acknowledgment/acceptance.

It is not possible under Luxembourg law to take a floating charge over the assets of a company. A similar effect can however be created using a general business pledge under certain specific conditions.

Entities in Luxembourg can provide downstream, upstream, and cross-stream guarantees. However, there are some limitations and restrictions associated with these guarantees.

Corporate Benefit

Luxembourg law requires that the guarantor must derive a corporate benefit from providing the guarantee. Upstream and cross-stream guarantees are usually limited by including a market standard limitation language. The amount to be taken into account is usually the higher of the amount at the time of grant of the guarantee or at the time of enforcement.

Financial Assistance

There are restrictions on financial assistance, particularly for public limited liability companies, which may limit the ability to provide guarantees for the acquisition of their own shares.

Depending on the corporate form of the target, financial assistance rules apply. A whitewash procedure is available but not very often used.

Works Council

There is no specific restriction when it comes to works council.

Hardening Periods

Luxembourg insolvency law includes a “hardening period” (known as the “suspect period”) which is designed to protect creditors in the event of insolvency. This period can run up to six months prior to the declaration of insolvency and may lead to the unwinding of transactions that are considered prejudicial to creditors. Financial collateral arrangements such as share and receivables pledges are not subject to insolvency hardening period rules.

Retention of Title

Both retention of title and extended retention of title are known constructs under Luxembourg law.

Anti-Assignment Provisions

Luxembourg recognises anti-assignment provisions, commonly included in contractual agreements to limit the transfer of rights or obligations to third parties.

Release agreements are normally entered into by all the parties.

Luxembourg law recognises multiple security rights over the same asset. The order or priority of such security interests is typically determined by the order in which such security rights were created. That order can be contractually varied by the holders of the security rights.

Subordination provisions are generally effective in the insolvency of a Luxembourg borrower.

The most important preferred claims arising by operation of law are tax, social security and salary claims.

The intercreditor agreement is usually governed by English law and follows LMA standards. Thus, related ICA terms are not Luxembourg specific.

Cash Pooling

Cash pooling is done in Luxembourg.

Hedging

It is typically possible in Luxembourg transactions for a borrower to enter into secured hedging, which would either rank super senior (up to a limit) or senior (subject only to being permitted hedging and the relevant hedging agreement complying with the terms of the applicable intercreditor agreement).

Licensing or Regulatory Limitations

With respect to licensing and/or regulatory limitations or holding of collateral, please refer to 2. Regulatory Environment and 4. Tax Considerations. 

Shared Security

Security is typically given to a security agent, which is expressly contemplated by the Luxembourg financial collateral law. If a lender transfers its claim on a borrower, this does not impact any financial collateral security given to a security agent.

Enforcement of loans and guarantees can take place by sending a demand for payment, taking into account any applicable contractual agreements. Enforcement of security takes place based upon the occurrence of an event of default (subject to contractual provisions). Such enforcement takes place either by private appropriation or by a private sale. Enforcement can happen relatively quickly and is straightforward. From an enforcement perspective it does not matter whether the lenders are banks or non-bank private credit providers. Most often in a restructuring, a share pledge enforcement is used to sell the business or do a loan-to-own, and an increase in the market in private credit financings is seen using this share pledge enforcement to implement a restructuring (if it is not possible to do the sale on a consensual basis).

A choice of a foreign law may be upheld in Luxembourg on the basis of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the Law Applicable to Contractual Obligations (“Rome I”). The submission to the jurisdiction of foreign courts may be upheld in Luxembourg, as may a waiver of immunity of jurisdiction.

In Luxembourg, the enforcement of a foreign court judgment or an arbitral award generally does not require a retrial of the merits of the case, but certain conditions must be met.

It is difficult to challenge an enforcement, except in case of fraud or abuse of rights.

The enforcement as such is instantaneous but usually takes up to two months to prepare. The costs of the enforcement are adviser and valuation costs and depend on the circumstances and complexity of the matter.

Because the enforcement process is relatively simple, it is an effective tool to force parties into a consensual solution. Such a consensual solution is usually more cost effective.

Enforcement of security can take place outside as well as during insolvency, and in both cases the secured creditor can take recourse against the proceeds in full.

The main insolvency procedure in Luxembourg is the bankruptcy procedure, which is a liquidation procedure. Financial collateral arrangements remain enforceable despite the opening of bankruptcy proceedings.

During insolvency, a secured creditor can take recourse against the secured assets in full. Any residual claim constitutes an unsecured claim which shall rank pari passu with the other unsecured creditors in the insolvency. All the costs of the estate, including the salary of the bankruptcy trustee, costs for liquidation and potential litigation in relation thereto, and investigation of the causes of bankruptcy, rank ahead of unsecured creditors. Also, tax and social security claims as well as certain employee and rental obligations shall have a prior ranking ahead of the unsecured creditors.

Luxembourg insolvency proceedings take several years and all the costs of the bankruptcy are paid, as a preferred claim, out of the estate value. This means that insolvency proceedings are often value destructive. Also, secured creditors can take recourse outside of the bankruptcy proceeding, but unsecured claims will often only receive payment (if value is available to them) at the very end of the insolvency proceeding or when assets have been sold.

Under Luxembourg law a debtor can initiate a judicial reorganisation procedure to implement a restructuring, which involves setting up a restructuring plan, and where there is also a cram-down procedure possible that can involve write-off of debt, extension of maturity dates, debt-for-equity swaps and similar arrangements. This is a new procedure which has been available since 1 November 2023.

Insolvencies are usually value destructive and all costs of the bankruptcy will need to be paid out of the estate. Upon the opening of the insolvency proceeding, a court-appointed bankruptcy receiver will take over, which means there is loss of control. Furthermore, a bankruptcy receiver is obliged to investigate the causes of bankruptcy, which include preferential transactions and any form of director liability claims. Lender liability is normally not the primary concern.

Transactions entered into during the so-called hardening period (the period preceding the opening of the bankruptcy proceedings by a maximum of six months) are void or voidable if certain conditions are met (transactions at undervalue, knowledge of the cessation of payments, etc). There is no time limitation for transactions which were done in fraud of other creditors rights.

Set-off can be applied during insolvency.

Private credit restructurings usually include a share pledge and receivables pledge enforcement, which can be implemented without co-operation from the existing equity holders. In case there is co-operation from those parties, the restructuring can be implemented on a consensual basis. Frequently, the preparation of a share pledge enforcement is an effective tool to come to a consensual transaction with the existing equity holders.

A debtor can initiate a judicial reorganisation process to implement a restructuring, which includes a cram-down procedure that can involve write-off of debt, extension of maturity dates, debt-for-equity swaps and similar arrangements. The reorganisation plan is considered approved by the creditors when, in each class, the ballot receives the favourable vote of the majority of the creditors, representing by their uncontested or provisionally admitted claims, half of all amounts due in principle. If the plan has not been approved by the affected parties in accordance with the majorities requested in each class authorised to vote, it may nevertheless be homologated upon proposal by the debtor, or with the agreement of the debtor, and be imposed on the dissident classes authorised to vote under certain conditions. Secured creditors’ consent is needed for any measure other than a stay during a limited period of time. The homologation of the reorganisation plan makes it binding on all stayed creditors.

A pre-pack insolvency – ie, a pre-arranged sale of a business which is implemented upon the opening of insolvency proceedings, is currently not available in Luxembourg. Balance sheet restructurings are not implemented through insolvency, but by a share pledge and receivables pledge enforcement process.

There are not many notable cases which are publicly known and merit reference in this context.

See 8.1 Notable Case Studies.

See 8.1 Notable Case Studies.