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What types of debt securities offerings are typical, and how active is the market?
The Grand Duchy of Luxembourg (Luxembourg) is a renowned financial centre, and particularly active in the debt segment of the capital markets. As a result of favourable legal and tax frameworks, debt issuances of all types are frequently structured through Luxembourg. In addition, the markets operated by the Luxembourg Stock Exchange (LuxSE) are prominent in the listing and negotiation of debt instruments. To date, the LuxSE operates two markets: the regulated market (within the meaning of the Directive 2014/65/EU on markets in financial instruments (MiFID II)), which falls within the EU harmonised regime and offers simplified access to other European regulated markets thanks to the European passport for prospectuses (Regulated Market); and the exchange regulated market, set up in 2005 as a multilateral trading facility within the meaning of MiFID II, which provides an alternative market to the Regulated Market (Euro MTF).
According to publicly available information and recent figures provided by the LuxSE, as of January 2017, the markets operated by the LuxSE had around 37,000 quotation lines of securities in 59 currencies from over 2,200 issuers in more than 100 countries. About 60 per cent of the debt securities listed in Luxembourg are listed on the Regulated Market. At present, a broad range of debt securities are traded on the LuxSE (representing around 70 per cent of all securities traded on the markets operated by the LuxSE). These debt securities include:
- international debt: the LuxSE is the European leader in terms of listed international bonds; around 40 per cent of international debt securities in Europe are listed on the LuxSE;
- high-yield bonds: the LuxSE is Europe’s leading exchange for the listing of high-yield bonds. About 50 per cent of European high-yield bonds are listed on the LuxSE;
- green bonds: the Luxembourg Green Exchange (LGX), which grew by 63 per cent in 2016, year of its launching, is the first platform dedicated exclusively to green securities. With 136 green bonds listed in 19 currencies by 24 international issuers, the LuxSE is the leading global exchange for green bonds;
- dim sum bonds: in 2011, the LuxSE admitted to trading the first dim sum bonds, denominated in the Chinese currency. Two-thirds of dim sum bonds that are listed on European stock exchanges are listed with the LuxSE and the first offshore yuan bonds in the eurozone by a mainland China issuer are also listed with the LuxSE;
- sovereign debt: the LuxSE lists at least one issue of the sovereign debt of 64 different countries;
- sukuk: the LuxSE was the first European stock exchange to list sukuk in 2002. Twenty-one sukuk have since then been listed on the LuxSE (including the sovereign sukuk recently issued by the Luxembourg state, the first sovereign sukuk to be denominated in euros);
- supranational debt: Luxembourg remains a prominent listing venue for supranational debt issuers, including the European Investment Bank, World Bank, European Bank for Reconstruction and Development, the European Stability Mechanism and the European Commission;
- asset-backed securities: in 2015, there were more than 3,500 asset-backed securities from over 650 issuers;
- convertible bonds: the LuxSE admitted the first ever contingent convertible bond for trading in 2011;
- debt issuance programmes: there were about 480 debt issuance programmes in operation on the LuxSE as of December 2017; and
- others: in addition, the LuxSE has listed other types of debt instruments, such as indexed bonds and commercial papers.
In addition, in 2017 the LGX launched two new segments dedicated to social and sustainable projects:
- social bonds: this newly created category of bonds allows the financing of social projects and benefiting from environmental, social and corporate governance credentials to the extent the proceeds from the relevant instruments are applied exclusively to finance or refinance social projects. To date, 14 bonds have been categorised as social, including bonds issued by the Council of Europe Development Bank and the Spanish Instituto de Crédito Oficial; and
- sustainable bonds: this category of bonds, also listed on the LGX, allows the financing of sustainable projects and benefiting from environmental, social and corporate governance credentials if the proceeds are applied exclusively to finance or refinance sustainable projects. To date, six bonds have been categorised as sustainable, including bonds issued by Finance for Development and the Development Bank of Japan.
Describe the general regime for debt securities offerings.
The regulatory framework applicable to public offers of debt securities, and to the listing thereof, derives essentially from the law of 10 July 2005 on prospectuses for securities, as amended (Prospectus Law), implementing in Luxembourg Directive 2003/71/EC, as amended (Prospectus Directive). In addition, the admission to trading of debt securities on both markets operated by the LuxSE is subject to the internal rules and regulations of the LuxSE (the edition of January 2018 replaced the version that entered into force on 1 July 2016) (LuxSE Rules).
Under the Prospectus Law, the issuance of debt securities may be subject to one of three different regimes, depending on the nature of the offering or the type of market where the securities are to be admitted to trading.
Public offers and admission to trading on a regulated market subject to EU harmonisation under the Prospectus Directive
No offer of debt securities to the public or admission to trading on a regulated market operating within the territory of Luxembourg is allowed unless a prospectus has been approved by the Luxembourg supervisory commission of the financial sector (CSSF). An offer of securities to the public is understood as a communication or solicitation to persons in any form and by any means presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to those securities. A prospectus drawn up in accordance with this regime is subject to EU harmonisation under the Prospectus Directive and Regulation 809/2004/CE, as amended (Prospectus Regulation) and benefits from the European passport.
Offers to the public of securities not encompassed by the Prospectus Directive
No offer to the public or admission to trading on a regulated market of debt securities falling outside the scope of the Prospectus Directive (eg, debt securities issued by public international bodies of which one or more member states are members) will be allowed unless a simplified prospectus is approved by the CSSF. Such simplified prospectus does not benefit from the European passport and the rules on harmonised offers. The principles regarding their content are laid down in CSSF Circular 05/210 on the drawing-up of a simplified prospectus within the scope of Chapter 1 of Part III of the Prospectus Law.
Admission to trading on a non-regulated market
The Prospectus Law provides that an admission to trading on a non-regulated market shall be decided upon by the relevant market operator. This is the regime that empowers the LuxSE to approve listing prospectuses for the Euro MTF in accordance with the LuxSE Rules. In this context, the CSSF acts as the authority responsible for supervising the LuxSE. High-yield bonds, a busy segment of the debt capital markets in Luxembourg, are in general subject to this framework, as they normally will qualify as exempted offers under one of the safe harbours described below (commonly referred to as private placements) and are typically admitted to trading on the Euro MTF.
Filing and documentary requirements
General filing requirements
Give details of any filing requirements for public offerings of debt securities. Outline any requirements for debt securities that are not applicable to offerings of other securities.
Pursuant to the Prospectus Law, no offer of debt securities shall be made to the public within the territory of Luxembourg without the prior publication of a Prospectus Directive-compliant prospectus duly approved by the CSSF or, as the case may be, approved by the competent authority in another member state and duly passported in Luxembourg. However, the Prospectus Law foresees certain exemptions from the obligation to draw up a Prospectus Directive-compliant prospectus (see in this respect question 10).
The requirements in connection with an application with the CSSF for the approval of a prospectus are set out in the Prospectus Law and CSSF Circular 12/539 (as recently amended by CSSF Circular 15/632 in order to reflect the amendments introduced by Directive 2014/51/EU in respect of the powers of the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority) and CSSF Circular 16/635 in order to reflect the amendments introduced by Commission Delegated Regulation (EU) 2016/301 with regard to regulatory technical standards for approval and publication of the prospectus and dissemination of advertisements). To the extent public offerings do not benefit from one of the exemptions to the obligation to draw up a Prospectus Directive-compliant prospectus as laid down in the Prospectus Law, an application will need to be made with the CSSF. The application with the CSSF must include a draft prospectus containing all information required to enable investors to make an informed assessment. Additionally, the submission file for approval by the CSSF should contain:
- an entry form indicating the legal ground for the approval, the purpose of the submission, the reference to the relevant annex to the Prospectus Regulation according to which the document has been drawn up, the timetable of the transaction and the requested date of approval, contact details of the filing agent, the issuer, etc; and
- a cross-reference list indicating where the information required under the annexes to the Prospectus Regulation can be found in the prospectus. The prospectus can be filed by the issuer, the offeror or by a person acting on behalf of one of these persons. The prospectus can be filed via email or other means of communication.
The issuer may draw up the prospectus as a single document or as separate documents in accordance with the Prospectus Directive, namely, composed of a registration document that contains the information relating to the issuer, a securities note that contains information concerning the securities, and a summary. For debt securities listed in article 8(4) of the Prospectus Law and in article 22(6) of the Prospectus Regulation (eg, debt securities issued under an offering programme or on a continuous or repeated manner by credit institutions in certain circumstances), the prospectus can consist of a base prospectus containing all relevant information regarding the issuer and the securities. The final terms of the offered securities shall then be provided to investors and filed with the CSSF as soon as practicable when each public offer is made. The information given in the base prospectus shall be supplemented if necessary with updated information on the issuer and on the securities.
Similar rules apply in the case of an application to the CSSF to approve a prospectus in connection with an admission to trading on the Regulated Market. In such case, a separate application for the admission to trading will also need to be filed with the LuxSE. Separately, the LuxSE Rules will govern the filing for approval of a prospectus in connection with the admission to trading on the Euro MTF.
In a public offering of debt securities, must the issuer produce a prospectus or similar documentation? What information must it contain?
As indicated above (see questions 2 and 3), no offer of securities can be made to the public within the territory of Luxembourg without prior publication of a Prospectus Directive-compliant prospectus approved by the CSSF (or, as the case may be, approved by the competent authority in another member state and duly passported in Luxembourg). Prospectuses for public offers of debt securities need to comply with the information requirements set out in the Prospectus Law and in the Prospectus Regulation, including the relevant annexes applicable to debt instruments. In general, the prospectus will contain information on the assets and liabilities of the issuer, financial position, profits and losses, future prospects, as well as on the rights attached to the offered securities. The prospectus shall also include information on the applicable risk factors, business and markets descriptions, financial statements of the issuers and management discussion and analysis. Additionally, a prospectus for securities within the scope of the Prospectus Directive will need to contain a summary conveying, in a non-technical language, the essential characteristics and risks associated with the issuer, any guarantor and the securities. There is no requirement for a summary where the securities have a denomination of at least €100,000 (wholesale securities). The Prospectus Law details the features of such summary, which follows requirements harmonised at EU level. Documents included by reference in the prospectus or simplified prospectus must also be filed with the CSSF. The CSSF may request further information to be included in the prospectus for certain types of issuers.
Where Luxembourg is the home member state (within the meaning of the Prospectus Directive) and an offer to the public is made in Luxembourg only, the prospectus may be drawn up in Luxembourgish, English, French or German. The same applies where Luxembourg is the home member state and public offers are made in more than one member state, however, in such case the prospectus must also be made in a language accepted by the competent authority of the host member state.
Describe the drafting process for the offering document.
Market practice in Luxembourg for drafting of offering documentation, notably the prospectus, closely follows international practices, standards and procedures. Typically, the prospectus or offering memorandum is drafted by the issuer’s counsel (often a joint effort by local and international counsel), in accordance with applicable rules and regulations, and closely reviewed by the issuer’s management team, the investment banks acting as managers and initial underwriters or purchasers, the auditors and the banks’ and issuer’s counsels. It is common practice to hold regular drafting sessions involving all parties, notably for the most relevant sections such as description of the debt instruments and management analysis and discussion of business prospects.
There are key documentation issues concerning the level and detail of disclosure on the issuer’s business and prospects, including the relevant risk factors, the description of certain matters of Luxembourg law relevant in the context of the issuance (insolvency law, corporate governance, tax) and the description of the main legal features of the debt instruments. Where the offer qualifies as an offer to the public and no exemption from the obligation to draw up a Prospectus Directive-compliant prospectus applies (see question 10), or the debt instruments are to be admitted to trading on a regulated market, the drafting process also involves in principle the CSSF (see questions 2, 3 and 4), as the regulator will comment in detail on the draft document until it is approved.
While offering documents prepared in connection with private placements (ie, benefiting from an exemption under the Prospectus Law from the obligation to draw up a Prospectus Directive-compliant prospectus), the respective drafting follows a similar process and will be subject to high standards of care and transparency. In case the private placement is followed by an application for trading of the bonds on the Euro MTF, the LuxSE will be involved in the review process of the listing prospectus.
Which key documents govern the terms and conditions of the debt securities? Who are the parties to such documents? How can such documents be accessed?
Issuance and offers of debt securities are primarily governed by three key documents:
- the terms and conditions of the debt instruments set out in detail the legal content of the debt instruments to be offered, governing the calculation and payment of interests, the amortisation of principal, the events triggering a mandatory or voluntary early redemption, the events of default, etc. Although these may be governed by Luxembourg law, it is common to have debt instruments offered in Luxembourg governed by English law or New York law. Specifically for the high-yield bonds segment, in which Luxembourg has been particularly active in the aftermath of the financial crisis, the debt instruments are created under an indenture or a bond trust deed, which, in addition to the terms and conditions, will also describe the applicable security package and guarantees, and also detail the usual incurrence and maintenance covenants agreed by the issuer;
- the underwriting or purchase agreement (or dealer agreement for debt programmes) governs the relationship between the issuer and the financial intermediaries who will assist in placing the instruments with the final investors (see questions 20 and 21); and
- the agency agreement governs the relationship between the issuer and the bank or banks appointed for the purpose of administering the outstanding debt instruments, including the making of payments of interest and principal, updates to the register of bondholders, if any, the sending of notices to investors and other actions on behalf of the issuer.
The terms and conditions are, as a rule, fully disclosed in the applicable prospectus or offering memorandum prepared in connection with the offer. In addition, the terms and conditions and agency agreement are usually made available to investors at the registered office of the issuer or the appointed agent. The underwriting agreement is normally a confidential agreement, not disclosed to investors.
In addition, other documents that may be prepared in connection with the offer include the relevant issuer’s corporate authorisations, the global certificates representing the debt instruments, engagement letters for auditors and the listing applications. When a trustee or common representative acting on behalf of the holders of the debt instruments is appointed, which is also common, a trust deed or appointment agreement is put in place setting out the roles, rights and obligations of this entity appointed to act on behalf and for the interests of the investors. For high-yield bonds issues, this is achieved under the applicable indenture or bond trust deed. Also, for secured issuance, as often is the case with high-yield bonds, the contractual documentation will also include the relevant security documents.
Does offering documentation require approval before publication? In what forms should it be available?
As indicated (see questions 2, 3 and 4), no offer of securities can be made to the public within the territory of Luxembourg without prior publication of a Prospectus Directive-compliant prospectus approved by the CSSF or duly approved by the competent authority of another member state and passported in Luxembourg unless one of the exemptions described in question 10 applies. Approval of the prospectus by the CSSF will depend on the authority being satisfied that the disclosure requirements set out in the Prospectus Law and in the Prospectus Regulations are duly met. This approval does not guarantee the economic and financial soundness of the offering, nor the quality and solvency of the issuer. The CSSF will require the document to contain an express disclaimer to this effect.
Once approved, the prospectus must be filed with the CSSF and made available to the public in advance of, at the latest, the beginning of the public offer of the debt securities involved. The prospectus will be deemed available to the public when published either:
- by insertion in one or more of the newspapers widely circulated in Luxembourg;
- in a printed form, which is available, free of charge, to the public at the offices of the LuxSE, or at the registered office of the issuer and at the offices of the relevant financial intermediaries;
- in electronic form on the issuer’s website or, if applicable, on the website of the relevant financial intermediaries; or
- in electronic form on the website of the LuxSE.
Offering documents for private placements (such as high-yield bonds benefiting from a safe harbour provision) are not subject to approval by the CSSF.
Are public offerings of debt securities subject to review and authorisation? What is the time frame for approval? What are the restrictions imposed, if any, on the issuer and the underwriters during the review process?
For public offers in Luxembourg, the Prospectus Law provides for a 10 business days review period by the CSSF (increased to 20 business days for first-time issuers), which starts to run when a complete file is submitted. If the CSSF finds, on reasonable grounds, that the documents submitted are incomplete or that supplementary information is needed, this review period shall start to run only from the date on which such information is provided. The CSSF shall notify the issuer or offeror if the documents are incomplete within 10 business days of the submission of the application. The failure of the CSSF to notify its decision within the review period set out above is considered to be an implicit decision of refusal.
The effective timetable for the approval of the prospectus can thus vary from two to three weeks to two or more months, mainly depending on whether the issuer is a first-time issuer, the existence of an existing registration document, the characteristics of the offer (cross-border, etc) or the securities offered (eg, the complexity of the terms and conditions) and the completeness of the file. For a first-time offeror or in the case of a complex transaction, as well as for transactions aimed at the retail market, it is thus advisable to file the offering documentation well in advance.
During the offer period, any promotional communication or advertisement relating to an offer of securities to the public must be clearly recognisable as such, and the information contained therein cannot be inaccurate or misleading and needs to be in line with the prospectus. Such document must also indicate that a prospectus has been or will be published and must indicate where potential investors are able to retrieve a copy thereof. Similar rules apply regarding public offers made pursuant to a simplified prospectus.
Regulation (EU) No. 596/2014 on market abuse (Market Abuse Regulation) as supplemented by Commission Delegated Regulation (EU) 2016/958 now sets out an harmonised framework throughout the EU to which persons producing or disseminating investment recommendations relating to listed securities need to comply with in order to ensure high standards of fairness, probity and transparency so as not to mislead market participants or the public.
On what grounds may the regulators refuse to approve a public offering of securities?
The CSSF will not approve the prospectus until it is satisfied that the prospectus meets all the requirements set out in the Prospectus Law and other applicable regulations. Depending on the framework chosen by the issuer, the requirements set out in the Prospectus Regulation and Part II of the Prospectus Law (in the case of a Prospectus Directive-compliant prospectus) or Part III of the Prospectus Law (in the case of a simplified prospectus) will need to be satisfied in the opinion of the CSSF prior to any offer of the securities is made to the public. Similarly, the LuxSE will refuse to approve a prospectus drawn up for the purposes of admitting debt securities to trading on the Euro MTF to the extent that the requirements set out in the Rules are not met.
How do the rules differ for public and private offerings of debt securities? What types of exemptions from registration are available?
Public offers in Luxembourg will, as a rule, require the drawing up of a Prospectus Directive-compliant prospectus either approved by the CSSF or by the competent authority of another member state and subsequently passported into Luxembourg. Closely following the Prospectus Directive, the Prospectus Law provides, however, for a set of safe harbours that allow an offer of securities to the public to be exempted from the obligation to publish a prospectus. This will be the case for offers of debt securities:
- addressed solely to qualified investors (as defined in the Prospectus Law);
- addressed to fewer than 150 natural or legal persons per member state, other than qualified investors;
- addressed to investors who acquire debt securities for a total consideration of at least €100,000 per investor, for each separate offer;
- whose denomination per unit amounts to at least €100,000; and
- with a total consideration in all member states of less than €100,000, which will be calculated over a period of 12 months.
As indicated, high-yield bonds issuances structured out of Luxembourg will typically be exempted from the requirement to draw up a Prospectus Directive-compliant prospectus as such offers are usually addressed solely to qualified investors. However, note that any subsequent resale of debt securities that previously fell within one of these safe harbours will be regarded as a separate offer and could trigger an obligation to publish a Prospectus Directive-compliant prospectus if said resale qualifies as an offer of securities to the public under the Prospectus Law, unless one of the aforementioned exemption applies to said resale itself. The placement of securities through financial intermediaries will be subject to the publication of a prospectus if none of the above-mentioned conditions are met for the final placement.
In addition, the obligation to publish a prospectus will not apply to public offers of debt securities:
- offered in connection with a takeover by means of an exchange offer, provided that a document is available containing information that is regarded by the CSSF as being equivalent to that of the prospectus, taking into account the requirements of EU legislation on takeover bids;
- offered, allotted or to be allotted in connection with a merger, division or any other similar restructuring operation, provided that a document is available containing information that is regarded by the CSSF as being equivalent to that of the prospectus, taking into account the requirements of EU legislation; or
- offered, allotted or to be allotted to existing or former directors or employees by their employer or by an affiliated undertaking provided that the issuer has its head office or registered office in one of the member states and a document is made available to the interested parties containing information on the number and nature of the debt securities and the reasons for and details of the offer.
While there are no specific rules governing exempted offers of securities, general principles of Luxembourg law will remain applicable, particularly in what concerns liability for inaccurate or incomplete information. Issuers and underwriters in the context of exempted offers are, therefore, required to treat all prospective investors (including qualified investors) fairly and equally, particularly concerning the material information made available in the context of the offer.
Describe the public offering process for debt securities. How does the private offering process differ?
For offers requiring the approval of a prospectus by the CSSF, the primary focus is on drafting such document in view of its submission to the regulator. This is a joint task by the issuer and underwriters and respective advisors and, depending on the characteristics and track record of the relevant issuer, will in normal circumstances take from four to 10 weeks (see question 8). The CSSF will accept to agree a tentative timetable for approval, although the approval will in any event be subject to all legal requirements being complied with. Once the prospectus is approved and, when appropriate, passported into other EU member states, the offer period can start, usually for a period ranging between five and 15 days. In parallel, the issuer’s management team and the underwriters will conduct marketing and sales activities to reach out to investors. As the offer period comes to an end, the underwriters proceed with the allocation of the offer, and settlement thereof will as a rule occur on the following third day (see question 22). Price stabilisation activities, if any, will follow usually during a period of up to 30 days. For debt offerings either exempted from the requirement to publish a Prospectus Directive-compliant prospectus or to be admitted to trading on the Euro MTF, which is typically the case for high-yield bonds, regulatory requirements are less stringent and, accordingly, the process is usually more flexible (particularly in relation to marketing activities, which may begin earlier in the process).
What are the usual closing documents that the underwriters or the initial purchasers require in public and private offerings of debt securities from the issuer or third parties?
Customary documentation to be produced in connection with a closing of a debt issuance (both public offers and private placements) include:
- counsel legal opinions covering Luxembourg matters and, where applicable, any relevant foreign law (eg, when the issuer group is based abroad, or when the debt instruments are governed by another law);
- certificates issued by appropriate officers of the issuer, providing usual assurances as to solvency and authority to enter into the relevant transaction documents; and
- auditor’s opinions and comfort letters.
What are the typical fees for listing debt securities on the principal exchanges?
The CSSF will charge a fee for the approval of a Prospectus Directive-compliant prospectus, ranging from €5,000 (for a prospectus) to €8,000 (for a base prospectus). Additional fees will apply for the approval of supplements, as well as in the case of multiple issuers or guarantors, up to a maximum of €15,000. For listings on the Regulated Market or the Euro MTF, the LuxSE charges a one-off visa fee for the review and approval of the prospectus of €2,500 for the first listing. A separate fee of €1,200 will be due for the listing and an annual maintenance fee, varying on the issuance size, from €500 to €800. Supranational issuers and recurrent issuers benefit from decreased fees.
Special debt instruments
How active is the market for special debt instruments, such as equity-linked notes, exchangeable or convertible debt, or other derivative products?
The LuxSE lists and negotiates equity-linked notes, hybrids and exchangeable or convertible bonds and has a high market share in this area (see question 1). In particular, the post-crisis years have seen a relevant increase in these types of issuances, particularly by financial sector entities looking to meet the regulatory capital requirements through the issuance of hybrid instruments.
The launch in 2016 of the LGX has boosted interest for green securities listings in Luxembourg. The LGX is the first platform dedicated exclusively to green securities whose purpose is to help issuers market their green securities by generating awareness about their green projects. To date, the LuxSE is the leading exchange for green securities with half of the world’s listed green bonds, amounting to 139 at the end of 2017.
In addition, under the umbrella of the LGX, issuers can as from 2017 also list social and sustainable bonds (see question 1). These two new categories of bonds are based on strict eligibility criteria (in line with the Social Bond Principles and the Sustainability Bond Guidelines developed by the International Capital Markets Association). An independent assessment on the use of proceeds, the selection process and management of proceeds is required for social or sustainable bonds to be categorised as such.
What rules apply to the offering of such special debt securities? Are there any accounting implications that the issuer should be aware of?
Issuance of special debt instruments generally follows the rules that apply to the offer and admission to trading of debt instruments. For Prospectus Directive-compliant transactions, the relevant offering documentation will need to comply with the disclosure requirements set out in the Prospectus Regulation and, specifically, in the schedules that apply to special types of equity-linked debt issuances. Where equity-linked debt instruments are to be issued and offered by a Luxembourg entity, a requirement for approval by a general meeting of shareholders may as a rule apply, including for the purpose of withdrawing the statutory preferential rights of existing shareholders.
Under the LuxSE Rules, convertible or exchangeable bonds may only be admitted to trading on the official list if the underlying shares are also admitted to trading on the same market, or in another market offering similar assurances. By derogation, these securities may, however, be admitted to trading to the official list provided that the LuxSE is satisfied that the holders of the debt instruments are provided with all the information required to make a prudent investment decision.
As far as the listings of green, social and sustainable bonds on the LuxSE are concerned, issuers will need to comply with certain specific disclosure and ex-post reporting obligations (to ensure that the proceeds are used for financing green, social and sustainable projects) and will need to obtain independent assessment on the use and management of the proceeds in order to join the LGX.
What determines whether securities are classed as debt or equity? What are the implications for instruments categorised as equity and not debt?
For the purposes of Luxembourg law, classification of a security as equity or debt will be determined by a substance approach, taking into account the relevant features of the securities. Typical features of equity instruments include voting alongside holders of common share capital, participation in the profits of the issuer, right to liquidation proceeds and to the residual value of the issuer and subordination to all other creditors. Conversely, typical features of debt instruments include a claim for payment of principal, fixed or variable interests, no voting rights alongside shareholders, no participation in liquidation proceeds. The Prospectus Law contains an express definition of equity securities, according to which, equity securities are shares and other transferable securities equivalent to shares in companies, as well as any other type of transferable securities issued by the same issuer (or another entity belonging to the same group), giving the right to acquire shares or transferable securities equivalent to shares.
The content of a Prospectus Directive-compliant prospectus will differ in an equity issue or a debt issue, as the relevant schedules of the Prospectus Regulation will require different elements to be provided to investors. In addition, debt instruments may benefit from certain safe harbour provisions, which may preclude the qualification of a securities offer as a public offer, or which may otherwise provide for an exemption to draw up and publish a prospectus (see question 10).
Transfer of private debt securities
Are there any transfer restrictions or other limitations imposed on privately offered debt securities? What are the typical contractual arrangements or regulatory safe harbours that allow the investors to transfer privately offered debt securities?
No general restrictions on transferability of debt securities are imposed in connection with offers of debt securities exempted from the obligation to draw up a Prospectus Directive-compliant prospectus, unless any subsequent offer of the relevant securities would qualify as a public offer, in which case the requirement to draw up a Prospectus Directive-compliant prospectus would apply to the extent no exemption thereto is applicable (see questions 2 and 10). In the context of private placements, it is customary for the transaction documentation (notably the underwriting agreement and the offering memorandum) to include an undertaking by the underwriters, directors or managers not to offer and sell the debt securities in a way that could trigger the requirement to draw up a Prospectus Directive-compliant prospectus under the applicable laws and regulations. Typically, these undertakings are devised to make sure that the relevant offer of securities falls under one of the safe harbours provided for in the Prospectus Law (see question 10).
Are there special rules applicable to offering of debt securities by foreign issuers in your jurisdiction? Are there special rules for domestic issuers offering debt securities only outside your jurisdiction?
Under the EU harmonised legal framework for mutual recognition of prospectuses under the Prospectus Directive, when Luxembourg is the host member state (as defined in the Prospectus Law), the prospectus, as well as any supplement to it, is valid for the purposes of a public offer in Luxembourg, or for admission to trading on a regulated marked operating in Luxembourg, as soon as the CSSF has received notification of the approval by the competent authority of the home member state of the relevant issuer. In such cases, the CSSF does not undertake any approval or administrative procedures relating to the prospectuses.
There are no special rules applying to securities offered outside Luxembourg by a Luxembourg issuer, except when Luxembourg is the home member state for the purposes of the Prospectus Directive, in which case the Prospectus Law and the EU harmonised framework for passporting of prospectus will similarly apply.
Are there any arrangements with other jurisdictions to help foreign issuers access debt capital markets in your jurisdiction?
Under the EU harmonised rules for mutual recognition of prospectus, issuers of debt securities that obtain the approval for a prospectus (in the context of a public offer or admission to trading in a regulated market) in another EEA member state may require the relevant home member state authority to notify the CSSF for the purposes of ‘passporting’ the prospectus. Once such process is completed, this will allow the issuer to offer the relevant debt securities in Luxembourg or admit such securities to trading on the Regulated Market (in the latter case, the LuxSE in its capacity of market operator of the Regulated Market will still need to approve the listing application).
What is the typical underwriting arrangement for public offerings of debt securities? How do the arrangements for private offerings of debt securities differ?
Underwriting activities in connection with Luxembourg debt capital markets follow very closely the prevailing standards in the international capital markets, notably the standards set out by the International Capital Markets Association. Underwriters will typically agree to purchase the offered securities, for subsequent dissemination with investors. A typical underwriting agreement will include the issuer’s representations and warranties, the agreement to purchase and sell the debt instruments, the covenants and undertakings of the issuer, the terms of the offering and the applicable indemnity clauses. In general, there are no fundamental differences in the underwriting arrangements for public offers and for private placements.
How are underwriters regulated? Is approval required with respect to underwriting arrangements?
Underwriters established in Luxembourg are subject to a licensing requirement with the CSSF and to the supervision of this regulator (unless duly licensed in other member states). Other than the requirements set out previously, underwriting agreements entered into in connection with debt issuances are not subject to approval by the CSSF.
What are the key transaction execution issues in a public debt offering? How is the transaction settled?
As a relevant international financial centre, Luxembourg hosts several clearing and settlement agents with significant background and experience in public offers and admission to trading in Luxembourg. Clearstream Banking SA, LuxCSD SA, Euroclear Bank SA/NV and BNY Mellon CSD SA/NV are the main players. Settlement and execution of debt issuances will fundamentally depend on the form of representation of the securities (see question 23). In any event, settlement and delivery of debt instruments occur typically on a payment-against-delivery basis, on the second day following the end of the offer or placement period. In such context, regardless of the actual form of the debt securities (bearer, registered or dematerialised), the debt instruments are subsequently registered in the books of the entity operating the relevant settlement system and thereafter credited to investors through the accounts held with the participant financial intermediaries. Admission to trading will, as a rule, occur on the date of settlement and issue of the debt securities.
How are public debt securities typically held and traded after an offering?
The traditional and still most commonly used form of representation for debt securities in Luxembourg is the registered form or bearer form. In both cases, the issuance is either represented by a global note deposited with a custodian or common depositary, who will keep the global note for the account of the central securities depositary(ies) or registered in the bondholders register maintained by the Luxembourg issuer at its registered office on behalf of a nominee for the account of the central securities depositary(ies). The latter then credits the accounts of its participants with the relevant number of issued debt instruments, who in turn will (directly or indirectly) credit the accounts of the ultimate investors. The applicable terms and conditions will provide only for certain exceptional circumstances in which definitive notes may be issued, notably in scenarios where there is a severe disruption of the accepted clearing systems.
The law of 6 April 2013 on dematerialised securities has introduced in Luxembourg the concept of dematerialised securities. This law requires the whole issuance of (debt) fungible instruments to be held through an issue account maintained with a central clearing entity, which is required to be based and recognised as such in Luxembourg, and are thereafter held through securities accounts maintained by investors (directly or indirectly) with financial intermediaries. The entry into force of the law on dematerialised securities has contributed to the modernisation of Luxembourg securities law by providing enhanced legal certainty and flexibility for cross-border issuances and holdings of securities.
Outstanding debt securities
Describe how issuers manage their outstanding debt securities.
Management of outstanding debt securities by Luxembourg issuers, or in relation to debt securities admitted to trading on one of the markets operated by the LuxSE, follows the prevailing market practices in the international capital markets. Such management will depend on the particular goals and needs of the relevant issuer, on the overall market conditions, and on the terms and conditions applicable to the relevant debt securities. The crisis years have evidenced a growing number of interactions between issuers and investors (acting through trustees or other fiduciaries), for the purpose of obtaining consent for certain actions (notably, in connection with rating triggers), as well as tender and exchange offers, as issuers seek either to take advantage of arbitrage opportunities or to extend the maturities of outstanding issuances. Issuers also frequently engage themselves in ongoing purchases of their securities on the open market. For listed debt securities, all these interactions are subject to mandatory disclosure and public dissemination (including in the LuxSE information system), so that interested investors can have access to the elements required to make informed investment decisions.
Regulation and liability
Are there any reporting obligations that are imposed after offering of debt securities? What information would be included in such reporting?
Where debt securities are admitted to trading on the LuxSE Regulated Market, reporting and disclosure obligations will apply to the issuers of such securities under the law of January 2008 on transparency requirements, as amended (the Transparency Law), the Market Abuse Regulation and the LuxSE Rules. Debt securities admitted to the Euro MTF are not subject to the Transparency Law, but will be subject to the reporting and disclosure obligations set out in the Market Abuse Regulation and the LuxSE Rules.
Under the Transparency Law, issuers of debt securities admitted to trading on a regulated market having chosen Luxembourg as their home member state are notably required to file, store and publish regulated information, which comprises, inter alia, financial information and any inside information, as defined under the Market Abuse Regulation. Certain exemptions exist, notably for certain public law bodies and also for debt securities with a denomination above €100,000. In addition, issuers are also subject to ad hoc disclosure requirements, such as the disclosure of any change in the rights of holders of debt securities or issuance of new debt securities.
Under the LuxSE Rules, in turn, issuers whose debt securities are admitted to trading on one of the markets of the LuxSE must, inter alia, communicate certain information to the LuxSE including information relating to events affecting the debt securities, such as any amendment affecting the respective rights of different categories of debt securities, any issue or subscription of securities or a change of the name of the issuer. In addition, issuers with debt securities admitted to trading on the Euro MTF will need to comply with certain publication requirement set out in the LuxSE Rules (eg, relating to any changes to the rights of bondholders).
Issuers of debt securities admitted to trading on the Regulated Market or the Euro MTF are further required to disclose any inside information as soon as possible (under certain conditions, such publication can be delayed). Inside information must be disclosed in a manner enabling the public’s fast access and complete, correct and timely assessment of the information. In practice, Luxembourg issuers rely for such purpose on the disclosure services offered by the LuxSE.
Additionally, the Market Abuse Regulation also requires each issuer of debt securities to ensure the prompt disclosure of all transactions on their issued securities effectuated by persons discharging managerial responsibilities of the issuer (or persons closely associated to such managers).
In 2017 the LuxSE introduced a new multi-functional reporting tool called FIRST (Financial Instruments Reporting Services Tool) to publish regulated information in accordance with regulatory standards. FIRST allows to simultaneously distribute announcements to the market, to the Officially Appointed Mechanism within the meaning of the Transparency Law and to the regulator through a single portal. The issuer can access the platform either directly or pass control to its agent or law firm.
Additionally, the use of a legal entity identifier (LEI) code, a 20-digit unique and universal identifier designed to permit absolute certainty in the identification of entities participating in financial transactions and exchanging information with local regulators and trading venues, has become a standard requirement under a number of EU regulations and directives, including capital markets legislation. In Luxembourg, issuers having securities admitted to trading on the Regulated Market or the Euro MTF are required to obtain a LEI code.
Describe the liability regime related to debt securities offerings. What transaction participants, in addition to the issuer, are subject to liability? Is the liability analysis different for debt securities compared with securities of other types?
Responsibility for the information given in a prospectus attaches to the issuer, the offeror, the person asking for the admission to trading on a regulated market or multilateral trading facility or the guarantor, as the case may be. This principle applies generally for debt securities and securities of other kinds. The Prospectus Law does not as such foresee an autonomous civil liability regime as it mainly establishes the situations upon which civil liability may be sought and the relevant persons incurring (non-exclusive) liability. The persons responsible must be clearly identified in the prospectus by their names and functions or, in the case of legal persons, their names and registered offices, as well as declarations by them that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its accuracy. This declaration will not, however, exempt from liability (whether liability in tort or contractual liability as the case may be) other parties contributing to the preparation of the prospectus, if it is evidenced that they have provided false or misleading information.
The Prospectus Law specifies in its article 9 that no civil liability shall attach to any person solely on the basis of the summary or of the translation thereof, unless it is misleading, inaccurate or inconsistent, when read together with the other parts of the prospectus, or it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities. The summary shall contain a clear statement to that effect.
What types of remedies are available to the investors in debt securities?
The most common remedy in the context of a debt securities offering is the liability for incorrect, inaccurate or incomplete information contained in the prospectus. Under Luxembourg law, the liability towards the underwriters by the issuer or the offeror will in general be contractual, whereas the liability of the issuer or the offeror towards the investors will as a general rule be based on civil liability in tort principles. For such purpose, civil litigation may be brought by investors seeking to recover any losses suffered in connection with the offer of securities. In addition, administrative proceedings may be started by the CSSF, both following a complaint by a private investor or by initiative of the regulator (see question 28).
What sanctioning powers do the regulators have and on what grounds? What are the typical results of regulatory inquiry or investigation?
The Prospectus Law provides the CSSF with broad powers to take remedies and sanctions in the case of improper activities in connection with offers of securities within Luxembourg. Under the Prospectus Law, the CSSF is entitled to:
- require additional disclosures in the prospectus;
- suspend a public offer or an admission to trading to the Regulated Market for a period of up to 10 working days;
- prohibit any advertisements regarding an offence; and
- prohibit a public offer or trading on the LuxSE.
In this context, the CSSF is entitled to publicly announce that a certain issuer or offeror is failing to comply with the regulatory obligations. Moreover, the CSSF has the power to impose administrative fines in connection with violations of the Prospectus Law. In this respect, it should be noted that, under Luxembourg law, a person who knowingly makes an offer of securities to the public in Luxembourg without having obtained approval for a prospectus under the Prospectus Law may be subject to a fine ranging from €250 to €125,000. In certain cases, similar behaviour may qualify as a criminal offence.
The CSSF is also the competent authority to monitor compliance with and enforce the provisions of the Transparency Law and the Market Abuse Regulation. Directive 2014/57/EU on criminal sanctions for market abuse (Criminal Sanctions Market Abuse Directive) has been transposed into Luxembourg law by the law of 23 December 2016 on market abuses (Market Abuse Law).
Being the competent authority for the purpose of the Market Abuse Regulation in Luxembourg, the CSSF supervises its application and may impose administrative sanctions as set out in the Market Abuse Law. The scope of sanctions is completed by a set of criminal sanctions also set out in the Market Abuse Law.
In terms of administrative sanctions, the CSSF is entitled to sanction market abuses (ie, insider dealing, unlawful disclosure of inside information or market manipulation) in different manners, from an injunction to stop the prohibited behaviour, the issue of a public warning disclosing the name of the person responsible for the prohibited behaviour to fines up to €5 million (or a fine up to €15 million or 15 per cent of the annual turnover in case of a violation by a legal person) or up to 10 times the profit derived from the illicit transaction.
Separately, the criminal sanctions relating to the same market abuses comprise, to the extent the person has the intention to obtain for himself or for the benefit of a third party an illicit gain, a fine up to €5,000,000 or an imprisonment of up to four years, or both, for violations of the insider dealing prohibition (including the recommendation to engage in insider dealing) and market manipulation (or a fine of up to €15 million in case of such a violation by a legal person). Those amounts can be increased up to 10 times the profit derived from the illicit transaction and shall in any event not be lower than the amount of the actual profit made, if such profit is determinable. In case of violations to the prohibition to unlawfully disclose inside information, and again to the extent the person has the intention to obtain for himself or for the benefit of a third party an illicit gain, a fine of up to €500,000 or imprisonment of up to two years for (or a fine of up to €1.5 million in case of such a violation by a legal person) can be imposed. It is worth noting that any attempt to commit any of the aforementioned prohibited activities shall be punishable by the same criminal sanctions.
Administrative sanctions (but not criminal sanctions) are also specified for violations of the notification obligations of managers for failures to notify the relevant issuer or the CSSF of transactions conducted on their own account relating to the securities of that issuer or derivatives or other financial instruments linked thereto.
In the case of securities admitted to trading in Luxembourg, the LuxSE supervises the compliance by the issuers with the LuxSE Rules. In terms of sanctioning powers, the LuxSE can suspend or withdraw from trading any debt security that no longer complies with, or whose issuer no longer conforms to, the provisions of the LuxSE Rules relating to disclosure obligations, except where that measure would be likely to significantly damage the interests of investors or to compromise the orderly operation of the market. Further, the LuxSE can, on its own initiative, delist debt securities from trading on a market when it is of the firm belief that for specific reasons, the normal and consistent market for these debt securities cannot be maintained.
What are the main tax issues for issuers and bondholders?
Payments of arm’s-length interest and repayments of principal on non-profit-sharing debt instruments are, as a general rule, not subject to withholding tax in Luxembourg. Interest paid on (wholly or partially) profit-sharing instruments can be qualified as a profit distribution subject to a 15 per cent withholding tax unless reduced or exempted by a domestic law exemption or applicable double tax treaty. A 20 per cent withholding tax may be levied in Luxembourg, to be applied by the paying agent or the recipient on a spontaneous self-assessment basis, to payments of interest on debt instruments that are owned by Luxembourg individual resident holders acting in the context of the management of their private wealth. This withholding tax would then apply as a final levy.
Non-resident individual and corporate holders of debt instruments, who have neither a permanent establishment nor a permanent representative nor a fixed place of business in Luxembourg to which the debt instruments are attributable, are not liable to any Luxembourg tax or filing obligations on repayments of principal or payments of interest on the debt instruments or capital gains realised upon a disposal of the debt instruments.
Luxembourg resident corporate holders of debt instruments not benefiting from a special tax regime must include any interest and gains derived from the debt instruments in their taxable income. Resident corporate holders benefiting from a special tax regime, for example, certain undertakings for collective investments, specialised investment funds or family wealth management vehicles, may be exempt from tax on interest and gains realised on debt instruments held.
Luxembourg individual resident holders of debt securities must include any interest and gains derived from the debt instruments in their taxable income that is regularly liable to income tax and surcharges at progressive rates, unless the final 20 per cent withholding (as referred to above) applies.
No transfer taxes are applicable to debt instruments. In general, no registration duties will apply unless debt instruments are voluntarily registered with an official authority (there is no obligation to do so) or explicitly referred to in a notarial deed or in the course of litigation, in which cases, fixed or ad valorem registration duties might apply.
No Luxembourg value added tax is generally levied with respect to payments made in consideration of the issuance of debt instruments, payments of interest on debt instruments, repayments of principal or redemption of debt instruments or transfer of debt instruments.
Update and trends
Update and trends
Updates and trends
2017 was a particularly successful year for the Luxembourg financial centre for capital markets, with 11,128 new listings, €1.11 trillion issued and €6 trillion listed on the LuxSE as at the end of the year.
The LuxSE has been extremely active in terms of product innovation and technology. In particular, the LuxSE has recently started offering issuers the possibility to register their securities on its official list without admission to trading. These securities are included in the Securities Official List (SOL), which is a dedicated section of the LuxSE’s official list. LuxSE SOL has been designed for issuers looking for visibility and for whom admission to trading is not a prerequisite and who do not intend to be subject to the regulations related to admission to trading (notably the Market Abuse Regulation). The procedure for issuers who intend to register their securities on the SOL is fairly straightforward. Issuers must provide in this respect, inter alia, an information notice in English, French or German, which includes, at a minimum, details about the securities and the issuer, an application form containing a declaration that the issuer will comply with the terms and conditions set out in the LuxSE SOL Rulebook, a written confirmation that the issuer and the securities comply with the applicable legislation and regulations and the articles of incorporation and annual reports of the issuer.
Another example of the LuxSE’s bent for innovation is the FIRST platform, an integrated tool that provides solutions for regulatory reporting, filing and documentation storage and allows issuers to simultaneously distribute announcements to the market, to the Officially Appointed Mechanism and to the regulator.
In addition, the LuxSE ran the first real blockchain transaction in the history of investments funds through the FundsDLT initiative (developed in partnership with KPMG and InTech).
Finally, the LuxSE’s firm commitment to sustainable finance has been boosted through the launch of two new segments dedicated to sustainable and social projects in the LGX.
New Prospectus Regulation
As part of its Capital Markets Union plan and in order to improve accessibility to capital markets for bond issuers and investors, on 14 June 2017 the European Union adopted Regulation (EU) 2017/1129 on the prospectuses to be published when securities are offered to the public or admitted to trading on a regulated market, repealing Directive 2003/71/EC (the New Prospectus Regulation). The New Prospectus Regulation entered into force on 20 July 2017 and, save for certain exceptions, will apply from 21 July 2019.
The New Prospectus Regulation will replace the current Prospectus Directive in order to harmonise prospectus regimes throughout Europe. The main two objectives of the new regime are to enable companies to raise money more easily on the capital markets and to reduce administrative burdens and costs, particularly for small and medium-sized companies (eg, as from 21 July 2018 small capital-raising of up to €1 million in total over a period of 12 months, as opposed to €100,000 under the current regime, will be exempted from the obligation to draw up a prospectus). This new prospectus regime will reduce the number of divergent rules among member states to a minimum and is an important step in the creation of a single European Union capital markets union.