Private Secured LoansSecured private loans
Financing and collateralised loans in Luxembourg
Luxemburg is the leading private bank in the euro area and the second biggest mutual fund home in the rest of the globe. Luxembourg's stable politics, law and finances, together with its innovative spirit and global reach, make it an excellent place for private and corporate investor from around the globe. For example, wealth management and private equities groups, as well as bankers, insurers, payment institutes and many other experts in the field of finance have opted for Luxembourg in order to develop their pan-European activities and gain a foot in the euro zone.
Luxembourg's flexibility and creditor-friendly handling of collateral rights remains very appealing to foreign bankers. At the same time, there is a growing tendency for more loans from bankers to be granted to Luxembourg investment trusts, whether for bridging or leveraging capital. Are secured loans a regular business in your jurisdictions? Collateralised loans are a regulatory business in Luxembourg where they involve the supply of financing activities on a commercial scale (e.g. loans to the public).
Under the 1993 Luxembourg law on the finance industry, a firm must be either licensed as a bank (if it receives funds from the public) or licensed as a specialist in the finance industry engaged in finance work. Is there a particular set of regulatorial questions that a potential lender should consider when agreeing or concluding a secured line of credit? 4.3.1.
As a general rule, if the Mortgagor is not a supervised undertaking, there are no regulatory limits or restraints on the use by a Luxembourg Mortgagor of income from a secured credit line. Nevertheless, all loans granted to or requested by a Luxembourg creditor for illicit ends are forbidden and the general derogation of law and order also applies.
Is there a particular set of regulatorial questions that a potential creditor should consider when agreeing or concluding a secured credit arrangement? As long as these credit operations are not regarded as regulating operations in the finance industry, such as, in particular, the provision of loans to the general public, a potential creditor may voluntarily lend or make funds available to a Luxembourg debtor.
Luxembourg's Financial Sector Authority has provided some indications of the importance of'public' and has indicated that it generally relates to a large number of unidentifiable people. Financing transactions concluded by Luxembourg companies with other group companies are not licensed. Loan transactions concluded by supervised Luxembourg mutual trusts or securitisers (including the receipt/granting of collateral) are permitted in general, but may be included in the relevant documents or in the specific legislation governing such trusts or vehicles. 7.
In addition, the acquisition of loans on the aftermarket is not approved, while the acquisition of loans on the aftermarket is approved, while the acquisition of loans by factors with a component of loans is approved (unless a Luxembourg SE is used to acquire industrial exposures). EU resident FIs granting loans in Luxembourg that are classified as finance industry operations do not need a license on the basis of EU legislation on the free provision of a service, the free movements of capitals and the free circulation of goods, which in this regard takes precedence over country-specific licensing conditions, provided that these latter types of service are backed up by authorizations obtained by creditors in their home state.
For non-EU EC MFIs and other third country nationals not domiciled in Luxembourg but offering their service in Luxembourg, a license is needed. Which are the current suppliers of secured financing in your country (e.g. foreign bankers, domestic bankers or non bankers)? In Luxembourg, financing operations are conducted by both multinational and domestic banking houses.
Also, a number of major players are developing in Europe (including Luxembourg) as a subsidiary of a number of CBS. Luxembourg's attractiveness to a wide range of institutional and institutional clients is mirrored in the range of available forms of finance, from secured and uncovered loans for acquisitions, property, structuring, project, funds or Islam finance to high-yield debt either raised or secured by Luxembourg companies.
Does your legal system use customary commercial credit facilities for secured credit operations? Since a large part of the credit financing in Luxembourg comes from overseas countries such as the United Kingdom, the United States or Germany, the law of these countries usually governs the credit agreement. Although the credit contracts are largely on the basis of standardised credit contracts concluded by the LMA (Loan Markets Association) or the LSTA (Loan Syndication and Trading Association), they generally contain the usual creditors' usual credit arrangements in the respective countries.
Luxembourg's collateral arrangement for Luxembourg-based property is evidenced by Luxembourg legal collateral arrangements which largely contain customary commercial terms, thereby minimizing protracted negotiation between the contracting entities. Does your legal system recognise the existence of collateralised credit lines? Bank Secured Credit Facility syndication is generally provided to Luxembourg borrower but, as noted above, Luxembourg legislation is seldom subject to the corresponding credit covenants.
When Luxembourg legislation applies to subsidised credit lines, they usually comply with the usual LMA or LSTA agreements. Under the Luxembourg Civil Code, the act of acting as an intermediary (mandate) is recognised as a contractual agreement under which the intermediary is acting in the name and on that of the client; this is the foundation on which a credit intermediary is nominated to act on that of the other members of the consortium.
The Luxembourg Securities Act explicitly provides that, in connection with collateralised loans, securities may be provided by a party who acts on account of the beneficiary of the securities. Thus a safety agent/security fiduciary can act on account of other consortium members and provide these members with qualified securities in accordance with the Luxembourg Securities Act, even if the safety agent/security fiduciary itself is not the holder of the claim secured by the same.
Consequently, no concurrent provision for liabilities is necessary for collateral agreements covered by the Luxembourg Collateral Act. In your jurisdictions, does the Act allow collateral and warranties to be fiduciarily retained by a collateral fiduciary for the account of the bank consortium? Luxembourg legislation does not include the terms "trust", "trustee", "security trustee" and related notions.
In Luxembourg, however, according to the Fiduciary Act 2003 as currently in force (implementing the Hague Convention of 1 July 1985 on the laws and regulations relating to trust matters and its recognition), cross-border foundations may recognize cross-border foundations. Accordingly, the Luxembourg courts recognize the laws selected by the contracting partners and the effect of the TRUST, with some exemptions - which include the non-recognition of the selected laws in the case of a narrower association with another legal system that does not recognize GRUST, the imposition of binding rules and the general exemption of ordre public. 3.
Thus, a Cover Custodian may act on account of other members of the Consortium and provide such members with qualified securities in accordance with the Luxembourg Guarantee Act, even if the Cover Custodian itself is not a holder of the claim secured by the Guarantee. In the case of secured financings for SBVs, is it customary to use SSVs to store the asset to be funded?
As a rule, would collateral be provided for the SPV units or would creditors demand immediate collateral? In Luxembourg, SPAs are widely used to keep the financial resources to be funded. If necessary, collateral is provided directly by the creditors in the form of structured collateral (e.g. a lien on the SPV's Luxembourg account and receivables).
It is the most frequent benchmark in Luxembourg. Is there a regulator's limit on the interest rates that can be applied to credit from banks? Nevertheless, a Luxembourg judicial authority with jurisdiction may lower any interest rates contracted for to the statutory ceiling if the judicial authority considers the interest rates for a Luxembourg debtor to be overstated.
It can be regarded as a point of general order under Luxembourg legislation. Moreover, under the arrangements subject to Luxembourg legislation, no interest may be payable if it is past due with the principal, unless such interest has been due for at least one year and the contracting partners have expressly stated in an arrangement (to be concluded after the expiry of the period of at least one year) that such interest may be accrued (or, in the absence of such an arrangement, the appropriate courts have paid compound interest at the creditor's request) - all in accordance with Article 1154 of the Luxembourg Civil Code.
Under Luxembourg legislation, Art. 1154 could still be regarded as a point of general order and could repeal the applicable rules of domestic law. In Luxembourg, guarantee contracts are frequently called upon; in the case of large cross-border financing operations, these guarantee contracts are often subject to non-national legislation (i.e. the credit contract law).
When choosing Luxembourg legislation, sureties and stand-alone (or first-demand) guaranties are the most commonly used types of private guaranties. It is an additional performance of the main commitment and is defeated by all objections applicable to the main commitment under the respective framework agreement(s). Commitments by the Guarantor shall represent an independent warranty which is not complementary to the main secured commitments and the Garantor undertakes unconditionally to make a payment either on first request or on production of certain documentation.
In the case of group financing, in particular in the case of warranties provided in favor of a holding or affiliated entity, certain factors are considered to limit the benefits and warranties of the undertaking, as follows. As a general rule, the warranties provided by a Luxembourg corporation take the legal form hereof of a letter of understanding between the contracting partners without further formality.
Conversely, the guaranty provided by a private individual is subjected to specialities. Luxembourg companies must act within the framework of their objects and interests as defined in their bylaws. In the event that the guaranty was provided outside the business purpose and interest of the sponsor, the individuals who subscribed to the guaranty shall have overstepped their terms of reference.
A Luxembourg judicial authority may therefore consider that the persons exceeding their powers act in their own name and not in the name and on the name of the corporation. Those contingencies are even greater if it is found that such a guaranty jeopardises the company's loan or is out of proportion to the guarantor's ability to pay.
In this regard, there is no general principle, but it is Luxembourg established commercial policy to restrict the amount of the guaranteed amount to a certain proportion of the net asset of the Luxembourg guarantor and, in some cases, to require the debtor to make a payment to the Luxembourg Guarantor. Reflections on funding will also be taken into consideration.
Warranty may be voided and the officers of the corporation may be prosecuted if the warranty has been given to make it easier for a third person to acquire the corporation's stock. There is a white-wash process for joint-stock corporations according to which they may under certain circumstances give monetary support.
Outline the most commonly used ways to structure the priorities of debt and collateral. With the exception of asset management firms and their lenders and purchasers, Luxembourg legislation does not govern contractordination. On 9 January 2013, however, the Luxembourg Court of Appeal upheld the most important rules for the applicability and enforcement of restraining covenants.
Except for legal entitlements to preference privileges, subordinate lenders will be ranked according to the priorities set forth in the respective seniority letter. Intermediary believer clauses which determine the ranking of believers and the securities available to them are customary in Luxembourg. As a rule, they are regulated by non-domestic legislation (i.e. the legislation that applies to the principal funding arrangements).
Is there any tax, stamping tax or other charge to be paid when a credit, surety or interest is granted or enforced? Luxembourg legislation in general does not require the filing, recording or filing with any judicial or other body in Luxembourg or the payment of stamping, transfers, capital, registrations, issuing or similar levies or any government fee or charge in connection with the implementation, fulfilment and enforceability of credit contracts or sureties by the competent party under Luxembourg or non-Luxembourg legislation, except in the following cases: Mortgage, pledge of a company and securities in respect of aircraft, barges or boats of an overseas nature must be applied to the competent body in Luxembourg.
Finally, registrations may be made on a optional base or on a commitment in the corresponding arrangements. It is more usual for it to be governed by domestic laws that regulate the conditions of the plant record, or is the laws of another jurisdication often chosen by the contracting party (e.g. British or New York law)?
Luxembourgian legislation seldom regulates the plant document itself. Securitisation document relating to Luxembourg property shall, however, be subject to Luxembourg legislation. Is there any restriction on lending by or the provision of collateral or guarantee to non-resident creditors? With the exception of creditors from jurisdictions on the black list of internationally sanctioned jurisdictions, there are no limitations on the provision of collateral or guarantee to non-resident creditors.
A lien on the going concerns/universal nature of the company may, however, only be accorded to approved banks, civil law offices or beer-houses. Lending by non-resident creditors is restricted by licensing agreements. Is there any control on currency that restricts payment to a non-resident creditor under a securities instrument, bond or contract of accommodation?
Luxembourg legislation does not contain any special rules on currency controls. Fulfilment of the pertinent arrangements should, however, comply with the rules on currency controls. It is possible to establish a lien over all of a company's financial instruments? Assuming so, would a lump-sum collateral arrangement be sufficient or is a lump-sum collateral arrangement necessary for each kind of financial instrument?
Under Luxembourg legislation, the terms "All asset security" and "floating charge" are not known or used. Luxembourg domiciled property is mortgaged under the terms of legally defined Luxembourg escrow arrangements. However, in the case of cross-border financing, a Luxembourg debtor sometimes provides a legally regulated overseas pending fee or bond. According to the Luxembourg Securities Act, as applicable from time to time, a guarantor can mortgage all current and prospective financing documents and receivables held by him without having to disclose them separately.
Different performance standards vary, however, according to the nature of the collateralised asset, so it is more usual to collateralise each asset under different arrangements. How do you formalise the provision of collateral for the most popular types of investment? As a rule, the approval of a Luxembourg collateral right is either evidenced by specific arrangements per asset class or by a master approval arrangement.
Assets are most commonly used as collateral in the form of either derivative assets or receivables mortgaged in accordance with the Luxembourg Security Act. Releasing a lien on shares: entry of the lien in the shareholders' registry of the corporation whose securities are mortgaged (similar procedures are applicable to option rights, debentures, share certifications and all other debt securities for which a registry exists); releasing a lien on claims: notice to the debtor(s) concerned.
Is it possible to provide collateral for property? And if so, what are the most commonly used securities for property and what is the process? Yes, Luxembourg property can be guaranteed a guarantee. Typical way of securing property is a contractually agreed mortgages. Liens on property can also be assumed, but this type of collateral is seldom used in practise as it involves a conveyance of ownership of the property to the secured lender.
Procedures A contractually agreed mortage must be made in written form and before a Luxembourg civil law notary public (with the exception of those granting loans in favor of the Luxembourg Banque et Caisse d'Épargne de l'État) and two witnessesses. In the notarised document, the pledged object and the amount secured by the mortage must be clearly stated. In the event of a contractually agreed loan that is not based on a notarised document, the loan is null and void and may be annulled by a Luxembourg judicial authority at any moment.
Secured liabilities must be secure and solvent, otherwise no mortgages will be registered. Failing an extension, the mortgages shall continue to be in force but shall cease to be assertible vis-à-vis third persons and the secured lender shall no longer have priority over the pledged object. Is it possible to guarantee safety for machines and plants?
And if so, what are the most commonly used types of collateral for this type of ownership and what is the process? Yes, safety can be guaranteed for machines and plants. This collateral is provided in the legal lien provided under the Luxembourg Code of Obligations and is carried out by means of a notarised document or private stamp.
Perfecting such a deposit shall require the assignment of the tangible ownership of the securities concerned to the securede. Guarantees will not be provided as long as the guarantor has the appropriate machines or installations, which makes it impracticable to provide guarantees for installations and stocks, while the pawner is able to use these facilities.
However, machines and plants can also be pawned by way of a pledging on the continuation of the company or the universal nature of the company (gage sur befonds de commerce). Liens on continuation/business universe usually include all pledgee asset (in the broadest sense, but with the exception of property ) such as clients, brands, patents, tooling, equipments and up to 50% of shares.
Any lien on the going concerns/universal nature of the company is governed by special provisions laid down in a Grand-Ducal Decree of 27 May 1937, as revised from time to time, and may only be extended to authorized banks, civil law offices or beer-houses. Specifically, a lien in force presupposes that the recipient of the lien is a Luxembourg or non-Luxembourg bank expressly authorized by the Federal Goverment (seated in the Council) to incur a lien on an ongoing corporate/business universe.
Furthermore, a prior letter of intent is necessary, which can be enforced against third persons after entry in the court registry of the jurisdiction in which the company is registered or in which the stocks or goods are held (valid for a 10 year extendable period). Given this and the need to obtain approval from the authorities, perfecting a lien on the going concerns or the company's universal nature is a long and expensive procedure (unless the bank concerned is already authorised).
Is it possible to provide collateral for claims? And if so, what are the most commonly used types of collateral for this type of asset and what is the process? Yes, collateral for claims can be provided in two ways: by assignment (rarely used in practice). Collateral orders of claims are subject to the Luxembourg Collateral Act and can be made under private seals.
Basically, a lien between the contracting partners comes into force and is completed at the time of the conclusion of the lien contract against the respective obligor and against third partys. Nevertheless, the party liable for the claims may effectively settle the debt in question if it is paid to the pledger as long as the latter was not aware of the occurrence of the pawn.
Therefore, a notification of pledging is a joint measure to make sure that the defendant is duly informed to whom payment can be made before and after the respective date of execution. You are also advised to obtain confirmation from the borrower that he has waived his set-off right and any other objections he may have against the holder of the claim in question.
A similar outcome can be obtained if the borrower becomes a partner in the garnishment arrangement. As a rule, creditors of accounts receivable are only informed of the claim promise upon the commencement of an execution date or other contractual release damage. That means that the securities are perfect (and the holder is not protected) only after such communication.
Is it possible to provide collateral for financing documents? And if so, what are the most commonly used types of collateral for this type of ownership and what is the process? Yes, collateral can be provided via the use of derivative financing instruments. Collateral provided in the form of pledged assets is the most commonly used form of collateral provided through the use of derivative assets and is regulated by the Luxembourg Collateral Protection Act.
There is a wide delineation of "financial instruments" in the Act which includes, inter alia, all negotiable as well as other negotiable assets (including company stocks, interests in UCIs, debentures and other types of debentures, notes), convertibles and rights under them. Those may be in tangible terms, without paper, negotiable by accounting or settlement, holder or register.
Liens on an instrument may be established under private seals and are enforced by the pledger delivering the asset to the pledger or to a third person nominated by the pledger and the pledger. Deliveries are made in various ways, including: in the case of pledging of recorded shares/securities/bonds: by entering the lien in the appropriate registry (e.g. in the case of a stock pledging in the stock registry) of the issuer whose shares/securities/bonds are mortgaged; by the conclusion of the pledging contract by the pledger and the pawn creditor if the latter is also the custodian of the mortgaged bonds (automatic perfection);
through the conclusion of a pawn contract (or inspection contract) between the pawn creditor, the pawn creditor and the custodian of the shares or between the pawn creditor and the pawn creditor, which is communicated to the custodian and according to which the custodian accepts in both cases to act on the instruction of the pawn creditor without further approval of the pawn creditor;
registering the transferable securities by entering them in an escrow deposit box opened in the name of the pledgee or an appointed third person, the transferable securities being referred to as "earmarking perfection" in the custodian's records by referring to the escrow deposit box on which they are located.
Is it possible to provide collateral in the shape of liquid assets? And if so, what are the most commonly used types of collateral for this type of ownership and what is the process? Yes, the collateral can be provided in the shape of liquid assets and is usually pledged in the corresponding liquid assets accounts. This pledging is subject to the Luxembourg Securities Act and can take place under private seals.
To third persons, the conclusion of an escrow contract between the pawn creditor and the pawn creditor and to the accountbank, the dispatch of a communication and the acknowledgment by the accountbank that it renounces all its claims on the respective escrow ( this includes the first-ranking deposit normally held by the Luxembourg accountbank on the money escrow in accordance with their general business conditions).
You do not need to lock the current balance to obtain a current pawn. Funds paid into the depositary' s accounts from an occasional basis may remain available to the creditor of the deposit until the creditor of the depositee' s accounts has decided to freeze the respective accounts after the occurence of a contractual triggered action by notifying the depositary' s accounts administrator that the funds have been blocked.
Usually, the corresponding pawn notification, confirmation notification and block notification are attached to the contract and their contents agreed between the contracting party and the accountbank before the contract itself is executed. Luxembourgian institutions shall enjoy a general interest in all securities/cash deposited by their clients in accordance with their general banking arrangements.
As is customary, the Custodian waives, upon application for surrender of any present or prospective interest or lien or set-off in or relating to (securities) holding books opened for the benefit of such Luxembourg banking institutions, if a lien is established for the benefit of a holder in respect of any or all of the securities/cash deposit which they hold.
Is it possible to provide certainty about IP? And if so, what are the most commonly used types of collateral for this type of ownership and what is the process? Yes, in Luxembourg IP protection can be provided by IPRs. All IPRs, which comprise trade marks, design marks, patent and copyright, are regarded as immaterial and the most commonly used way of securing such IPRs is by pledging them.
Since IPR are not covered by the Luxembourg Security Act's security definitions, however, IPR mortgages do not profit from the lender-friendly rules of the Act and are mortgaged under private lien deeds. Pledging of property right is completed under private label and cannot protect prospective property right.
Should only non registred property right be pawned (e.g. copyrights), this pawning will be completed by a notice about the pawning against the obligor. In case of pawning of registered intellectual property right, the pawn contract must be entered in the appropriate register of IPs in order to be enforcable against third party (e.g. a lien on Benelux trade marks or patterns is entered at the Benelux Intellectual Property Office, a lien on a Luxembourg based invention is entered at the Intellectual Property Office of the Luxembourg Ministry of Economics and a lien on a Europe wide invention is entered at the EPO).
In view of the various IPRs that can be pawned under a IPR pledging arrangement, such a registry procedure can turn out to be burdensome and sometimes expensive and therefore pawning of IPRs is seldom used in practise. However, it is customary to mortgage the claims associated with the IPRs arising from a pledging arrangement under the Luxembourg Security Act.
Finally, IPRs are part of an ongoing operation and can also be pawned under a general lien on an ongoing operation. Which are the joint trigger mechanisms for credit, guarantee and collateralisation? According to current practices, the default, the opening of bankruptcy procedures and the substantial default would be the main drivers of execution of loans and related securities documentation.
Under the assumption that execution will take place outside an event of bankruptcy, liens or mortgage obligations can only be enforceable if the respective obligor is in arrears, while pledged securities and receivables under the Luxembourg Act can be enforceable by the pawn creditor at the contractual execution date.
FIRST DATE warranties are regardless of the existance and applicability of the secured commitments. It is therefore adequate that the execution requirements laid down in the Indemnity Agreements are met, which often only results in the recipient of the Indemnity declaring that a delay has arisen and requiring repayment. Which are the most commonly used means of enforcing?
According to the conditions of the respective arrangement, loans and guaranties may be expedited or enforceable by a straightforward termination/claim to the borrowers or guarantors. With regard to safety, the methods differ according to the nature of the safety to be provided. Business pledge or mortage can be executed only after previous request for payment to the obligor of the secured debt (in the case of a mortage delivered by a bailiff).
In this case, the lien holder must request the approval of the local courts for the sale of the securities. As the pledge holder, the chairman of the regional tribunal may authorize the secured lien holder (or his secured lien officer) to dispose of all or part of the securities. Concerning safeguards for receivables and liabilities, the Luxembourg Safeguards Act provides for a number of enforceable measures.
to use the assets appropriately or to arrange for the provision of the assets by a third person at a predetermined pre- or post-delivery cost in accordance with an established pricing methodology (in order to prevent avoidance of dispute, it is normally advised to use the assets at their current value ); to offer the assets in a private offer at normal commercial terms, in a publicly traded offer (this is not an accepted practical option) or in auctions; and
to apply for a judgement by which the security is attributed to the pledger for the fulfilment of the secured obligations following a judgement of the appraiser of the security; in the case of securities, to recognise the value of the pawned property at its current value (if the securities are included in the formal listing of a Luxembourg or foreign based securities exchange or if they are dealt in on a regular, recognized and publicly available controlled market) or, if appropriate, at their net present value.
Bankruptcy administrator and all other bankruptcy costs; staff (claims of the last six month, maximum six fold the amount of the statutory wage ); national insurance (employee contributions); Luxembourg taxation authority; national insurance (employer's contribution); holders of credit secured by mortgage and lien; share holders.