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Structuring a lending transaction


Who are the active providers of secured finance in your jurisdiction (e.g., international banks, local banks or non-bank financial institutions)?

Financial transactions in Luxembourg are carried out by both international and local banks. German, French, UK and the European branches of US banks are the main players. European (including Luxembourg) subsidiaries of Chinese banks are also emerging as noteworthy participants.

The Luxembourg market is very welcoming to a diversity of investors, which is reflected in the types of financing available, ranging from secured and unsecured lending in acquisition, real estate, structured, project, fund or Islamic financing, to high-yield bonds either issued or guaranteed by Luxembourg entities. Financings provided by alternative lenders are also on the rise.

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

As a large part of loan financings in Luxembourg originate in foreign jurisdictions such as the United Kingdom, the United States or Germany, the laws of these jurisdictions usually govern the facility agreements. Therefore, even though the facility agreements are mostly based on Loan Market Association (LMA) or Loan Syndication and Trading Association (LSTA) standard loan agreements, they typically contain the terms and conditions that lenders in the relevant jurisdictions are accustomed to see.

The Luxembourg security package covering assets located in Luxembourg is documented in Luxembourg law-governed security agreements containing, to a large extent, market-standard provisions, thereby minimising the need for lengthy negotiations between parties.


Are syndicated secured loan facilities typical in your jurisdiction?

Syndicated secured loan facilities are typically made available to Luxembourg borrowers but, as mentioned above, Luxembourg law rarely governs the relevant facilities agreements.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?

Where Luxembourg law governs syndicated facilities, the latter usually follow the standard LMA or LSTA arrangements. The Luxembourg Civil Code recognises the agency concept (mandat) as a contract pursuant to which the agent acts in the name and on behalf of the principal; this is the basis on which a facility agent would be appointed to act on behalf of the other banking syndicate members.

In the context of secured lending, the Luxembourg Collateral Act expressly provides that financial collateral may be held by a person acting on behalf of the beneficiaries of the financial collateral. As such, a security agent/security trustee can act on behalf of other syndicate members and hold qualifying financial collateral under the Luxembourg Collateral Act on behalf of such members, even where the security agent/security trustee is not itself a creditor of the debt secured by the financial collateral. As a result, for security arrangements falling under the Luxembourg Collateral Act, no parallel debt provisions are required.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?

Under Luxembourg law, the legal concepts of ‘trust’, ‘trustee’, ‘security trustee’ and related legal concepts do not exist. However, foreign trusts may be recognised in Luxembourg under the Trust and Fiduciary Contracts Act 2003, as amended (implementing the Hague Convention of July 1 1985 on the law applicable to trusts and their recognition). Accordingly, the governing law as chosen by the parties and the effects of the trust will be recognised in Luxembourg, subject to certain exceptions – including the non-recognition of the chosen governing law in case of a closer connection with another jurisdiction that does not recognise trusts, the application of mandatory provisions and the general exception of public order.

As such, a security trustee can act on behalf of other syndicate members and hold qualifying financial collateral under the Luxembourg Collateral Act on behalf of such members, even where the security trustee is not itself a creditor of the debt secured by the financial collateral.

Special purpose vehicle financing

Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?

SPVs are widely used in Luxembourg to hold the assets that are being financed.

The shares of the SPV and of other group companies (including subsidiaries of the SPV) are also customarily pledged. Where appropriate in the structure, direct asset security is taken by the lenders (eg, a pledge over the bank accounts held by the SPV in Luxembourg and over any receivables owed to it).


Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?

The way in which interest is calculated will depend on the type of loan facilities made available, as well as on established practices of the lenders involved. Rates can be fixed or floating, or linked to reference rates such as LIBOR and EURIBOR. The latter is the most common reference rate in Luxembourg.

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

No legal provision prohibits the high remuneration on a loan. However, a competent Luxembourg court may reduce any contractually agreed interest rate to the maximum legal interest rate if the court finds the rate manifestly excessive for a Luxembourg borrower. This may be considered to be a point of international public order under Luxembourg law.

Further, under agreements governed by Luxembourg law, interest may not accrue where it is overdue on capital, unless such interest has been due for at least one year, and the parties have specifically provided in an agreement (to be made after that interest has become due for at least one year) that such interest may be compounded (or, absent such agreement, the competent court has granted compound interest on motion of the creditor) – all in accordance with Article 1154 of the Luxembourg Civil Code. Article 1154 could still be considered to be a point of international public order under Luxembourg law and could override the relevant foreign governing law.

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Guarantees are often used in Luxembourg; in large cross-border financings, these guarantees are often governed by foreign law (ie, by the law governing the facility agreement). Where Luxembourg law is chosen, the most common forms of personal guarantees are suretyship and autonomous (or ‘first-demand’) guarantee. Suretyship is ancillary to the principal secured obligation and is subject to all the defences that apply to the principal secured obligation under the relevant reference agreement(s). As a result, the guarantor may invoke all remedies that are available to the principal debtor in respect of the execution of its obligation, unless previously waived, which may threaten its efficiency.

An autonomous/first-demand guarantee is a type of guarantee created by international commercial practice and not by law, contrary to suretyship. It is a stronger commitment, characterised by its autonomous nature. The obligations of the guarantor constitute an autonomous guarantee that is not an accessory to the principal secured obligations and the guarantor engages itself irrevocably to pay a specific amount, either at first demand or following the presentation of specific documents. With regard to group financings, particularly in respect of guarantees granted in favour of a parent or sister company, certain corporate benefit and guarantee limitation considerations apply, as further set out below.

What is the procedure for their creation?

Typically, guarantees granted by a Luxembourg company take the form of a written agreement between the parties, with no further formalities. By contrast, suretyship granted by a natural person is subject to specific formalities.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (e.g., upstream guarantees)?

A Luxembourg company must act within the limits of its corporate object specified in its articles of association, as well as its corporate interest. Therefore, the granting of guarantees must fall within the scope of the corporate object and be in the corporate interest of such guarantee provider (the latter is a factual matter and is left at the appreciation of the guarantor's board/management).

If the guarantee was granted outside the scope of the corporate object and corporate interest of the guarantor, the physical persons who signed the guarantee will have exceeded their mandate. As a result, a Luxembourg court may consider that the person acting in excess of his or her power had acted in his or her own name and not in the name and on behalf of the company. The guarantee may be declared null and void if its beneficiary was aware that the granting of the guarantee fell outside the scope of the corporate object of the guarantor and/or was not in the corporate interest of the guarantor. In addition, the directors may incur criminal penalties for misappropriation of corporate assets if they derive a personal benefit from the granting of such guarantee.

These risks are even higher where such guarantee is found to endanger the credit of the company or is deemed disproportionate to the financial capacity of the guarantor.

That is why in practice limitations may apply in the case of upstream or cross-stream guarantees. There is no rule of thumb in this respect, but it is a well-accepted market practice in Luxembourg to limit the guarantee to a certain percentage of the Luxembourg guarantor's net assets and, in some instances, for the borrower to pay a guarantee fee to the relevant Luxembourg guarantor.

Financial assistance considerations shall also be taken into account. A guarantee may be declared void and the directors of the company may be held criminally liable if the guarantee has been granted with a view to facilitate the acquisition of the company's shares by a third party. For public limited liability companies, a whitewash procedure exists under which such companies are, under certain conditions, allowed to provide financial assistance.

Subordination and priority

Describe the most common methods of structuring the priority of debts and security.

Except as between securitisation companies and its creditors and investors, Luxembourg law does not regulate contractual subordination. There exists very limited local case law in relation to the recognition of contractual subordination provisions. However, the Luxembourg Court of Appeal confirmed on January 9 2013 the main principles applicable to the validity and enforceability of subordination clauses.

Subject to any statutory claims of preferential rights, subordinated creditors rank in accordance with the priority agreed in the relevant subordination agreement. Subordination clauses can be specific (eg, limited to a defined operation) or general. In general subordination clauses, the subordinated creditor accepts that if the debtor becomes insolvent or is liquidated, its claim is paid after all other creditors have been paid. Such a clause does not prevent the creditor from being paid when the debt becomes due and payable.

Inter-creditor agreements establishing the order of priority of the creditors and the security available to them are common in Luxembourg. They are usually governed by foreign law (ie, the law applicable to the main financing arrangements).

Documentary taxes and stamp duty

Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?

Under Luxembourg law, it is not necessary, as a matter of principle, to file, record or enrol with any court or other authority in Luxembourg or to pay any stamp duty, transfer, capital, registration, issue or similar duties or taxes or governmental fees and charges in relation to the execution, performance and enforcement by the relevant parties of Luxembourg law or foreign law loan agreements or security agreements, except for the following: mortgages, pledges over a going concern and security rights over aircrafts, inland ships or international vessels must be registered with the relevant public authorities in Luxembourg.

Furthermore, registration is required if such agreements are appended to a deed that is mandatorily subject to registration, or are lodged with the notary for his or her records. Lastly, registration may be made on a voluntary basis or pursuant to a contractual obligation in the relevant agreements. A fixed duty or ad valorem duty will be applied depending on the nature of the obligations.

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