Loan document terms

Standard forms and documentation

What forms or standardised terms are commonly used to prepare the bank loan documentation?

International financing transactions generally follow the sample standards of the banks extending the credit and contain the essentials of the terms and conditions in the contractual agreement. An Anglo-Saxon lender would follow the Loan Market Association (LMA) standards, while German and French banks would either following the LMA standards or go by their templates used in domestic transactions. Reference to Luxembourg law is fairly limited in those agreements but is used to comply with the imperative and public policy provisions prevailing in Luxembourg. When foreign lenders have established their operations or a branch in Luxembourg, LMA standards can be used with substantial reference to Luxembourg law. However, the use of this type of Luxembourg law LMA standard agreement is very limited in the market.

Bank loan documentation used in Luxembourg is mostly prepared on the base of the standardised terms of the LMA. The Association of German Banks provides a master agreement that is used from time to time.

Pricing and interest rate structures

What are the customary pricing or interest rate structures for bank loans? Do the pricing or interest rate structures change if the bank loan is denominated in a currency other than the domestic currency?

Interest rate structures will depend upon the types of credit loans and the banking practices of the lenders. A fixed rate is preferred in fixed asset-backed financing (real estate, equipment and immovable investments) while floating rates are used in most corporate lending transactions. It will generally be a US structure with a base rate or a LIBOR plus a margin fixed on a specific period. Mandatory costs may also be included in the computation of the interests to reflect cost of lending. Floating interest rates refer generally to a benchmark rate, such as SOFR for US dollars, SONIA for British pounds sterling, SARON for Swiss francs or TONA for yen, or EURIBOR for loans denominated in euros, or occasionally NIBOR (for Norwegian kroner), CIBOR (for Danish kroner) and STIBOR (for Swedish kronor) and a margin. In private equity transactions, exit fees are also common and ensure a minimum tax return from lenders on the loan operation.

Have any procedures been adopted in bank loan documentation in your jurisdiction to replace LIBOR as a benchmark interest rate for loans?

Since the investigations into the LIBOR manipulations and the outcome thereof through conviction of certain traders and the imposition of fines against large financial institutions, there has been discussion about changing the benchmark interest rate. In light of announcements from the Financial Conduct Authority, reliance on LIBOR can no longer be assured after the end of 2021.

In this context, the Commission of Financial Sector Surveillance (CSSF) issued a communication on 19 November 2021 (1) to encourage Luxembourg market players to cease their exposure to LIBOR settings by the end of 2021, (2) to remind them of the actions that they shall have put in place in the context of the cessation of the benchmark and (3) to inform them about the new designated replacement benchmarks.

Other loan yield determinants

What other bank loan yield determinants are commonly used?

Credit facilities are not issued at a discount; however, pricing floors can be instituted in respect of the determination of interest rates. Zero floor provisions are often included to avoid negative interest rates. Pricing on tranche B loans may be more diverse and can include conversion rights in equity or additional warrants with attractive pricing conversions with a view to enhancing the targeted return.

Yield protection provisions

Describe any yield protection provisions typically included in the bank loan documentation.

When a bank financing is put in place on the basis of a foreign law-governed LMA-style agreement, the following yield protection provisions are generally included in the loan agreement:

  • increased cost provisions to cover the costs that the lenders may incur as a result of:
    • the introduction of or any change in (or in the interpretation, administration or application of) any law or regulation; or
    • compliance with any law or regulation made after the date of the financing agreement (eg, according to Basel III, the Capital Requirements Directive (2013/36/EU) or Directive (EU) 2019/878);
  • make-whole amounts or prepayment fees;
  • tax gross-up provisions; and
  • break-up costs.

 

Gross-up provisions are, in most cases, irrelevant in Luxembourg since there is no withholding tax on interest payments in Luxembourg, but they aim at protecting any requalification of interest into profit distribution when rates are formed of a fixed and high variable portion deriving from the borrower profits.

Accordion provisions and side-car financings

Do bank loan agreements typically allow additional debt that is secured on a pari passu basis with the senior secured bank loans?

When a bank financing is put in place on the basis of a foreign law governed LMA-style agreement, and, in particular, in acquisition finance, accordion facilities can be included on an uncommitted basis. Depending on the negotiated terms, the debt may be secured pari passu.

To the extent permitted, additional debt can be incurred outside the financing arrangement and will, depending on the situation or the negotiation, be either super senior secured (DIP financing), pari passu secured or secured on a second-ranking basis. A specific intercreditor agreement will be put in place to arrange enforcement of security interests and the distribution of proceeds. Under the Financial Collateral Law, a security interest of a higher or lower ranking can only be granted with the express consent of the existing beneficiary of a security interest.

Financial maintenance covenants

What types of financial maintenance covenants are commonly included in bank loan documentation, and how are such covenants calculated?

When a bank financing is put in place on the basis of a foreign law-governed LMA-style agreement the following financial maintenance covenants are generally included in the loan agreement:

  • equity-to-debt ratio;
  • loan-to-value ratio, indicating the maximum percentage of the loan towards the value of a pool of assets;
  • an interest cover ratio, indicating the minimum ability of the debtor to pay its interest obligations for a certain interest period; and
  • capital expenditure indicating the maximum amount for capital expenditures.

 

In the case of a breach of a financial maintenance covenant, equity cure rights are included in the loan documentation enabling the sponsors to inject equity in the structure to cure such a breach.

In Luxembourg law-governed straight loans, the financial maintenance covenants will generally be limited to loan-to-value covenants and interest cover ratios.

Other covenants

Describe any other covenants restricting the operation of the debtor’s business commonly included in the bank loan documentation.

Covenant patterns follow the type of sample loan used in the transaction, in particular the common law or civil law orientation of the contractual documentation. Concepts of good faith in civil law imposed under Luxembourg statutory laws require the adoption of fair and responsible practices from lenders and borrowers. The contractual documentation may strengthen or add some obligations on the borrowers not foreseen in the law, such as covenants restricting payments of dividends, a disposal of assets, a change of control and negative pledges preventing them from granting additional security interests or securities with lower rankings, or incurrence of further debt.

Mandatory prepayment

What types of events typically trigger mandatory prepayment requirements? May the debtor reinvest asset sale or casualty event proceeds in its business in lieu of prepaying the bank loans? Describe other common exceptions to the mandatory prepayment requirements.

When bank financing is put in place on the basis of a foreign law-governed LMA-style agreement, mandatory prepayment is generally triggered by events such as a change of control, unauthorised payments of dividends by the borrower to the sponsor, a sale of assets and any other event that benefits the borrower to the extent not permitted under the loan facility or otherwise not authorised by the lender. In specific loans, contractual provisions may foresee that free cash proceeds exceeding certain pre-agreed thresholds trigger some prepayment obligations (cash sweep provision).

Debtor’s indemnification and expense reimbursement

Describe generally the debtor’s indemnification and expense reimbursement obligations, referencing any common exceptions to these obligations.

In straight loans governed by Luxembourg law, a borrower will indemnify the lenders for any costs, expenses or loss incurred by the lender in relation to:

  • investigating any event that it reasonably believes is an event of default;
  • acting or relying on any notice, request or instruction that it reasonably believes to be genuine, correct and appropriately authorised; or
  • instructing lawyers, accountants, tax advisers or other professional advisers or experts as permitted under the loan agreement.

 

A Luxembourg judge may, however, reduce the amount of those indemnities if it is considered as punitive damages.