LUXEMBOURG Trends and Developments Contributed by: Silke Bernard, Melinda Perera and Adrien Timmermans, Linklaters LLP
Finding Solutions to Address National Differences While the sector is expanding rapidly now, demand was already there in the past from leading international financial sponsor firms that have been examining the possibility of launching direct lending funds domiciled in Luxembourg for years. The problem was never the regulatory environment in the Grand Duchy of Luxembourg, but constraints in the jurisdictions of potential borrowers – for instance the banking monopoly on lending in certain borrowers’ countries. This obliged market participants to seek worka - round solutions in order to satisfy demand from borrowers. For example, to provide private financing to borrowers in countries with a strong banking monopoly, the lenders may have decid - ed to use loan notes financing instead or may be lending to a group entity of the borrower’s group in Luxembourg. This approach did also have the related benefit of bringing the transaction under Luxembourg’s rules governing security interests. The robust security package offered under the Grand Duchy of Luxembourg’s legislation, notably the 2005 Collateral Act, as amended in 2011, is an impor - tant factor in making the country a jurisdiction of choice in financings. However, more complex cross-border structures have sometimes been an issue. In certain coun - tries, special-purpose vehicles created below a fund were not allowed to conduct direct lend - ing activities, which, in many cases, required the creation of a lower-tier fund entity (rather than an SPV). There were also lending-related restrictions relating to borrowers in other coun - tries, all of which ultimately prevented European loan origination AIFs from using one single struc - ture to serve borrowers in all European markets.
EUR100 million in assets under management, 31% were midsize funds with assets of between EUR100 million and EUR500 million, a significant percentage increase from the previous year, and 22% held assets ranging from EUR1 billion to EUR5 billion. Regulator’s Clarification on Loan Origination A critical step in the development of Luxem - bourg as a leading European market for credit funds was the publication by the CSSF in June 2016 of an updated version of its frequently asked questions document on Luxembourg’s AIFMD implementing legislation. The revised FAQs clarified that Luxembourg AIFs were in principle permitted to originate loans, in the absence of any provisions in applicable legislation and regulations to prohibit it, as long as manager and fund have in place compliance policies and procedures, as well as adequate technical and human resources, including exper - tise in credit and liquidity risk management, to address all aspects and potential risks inherent in loan origination. The publication by the regulator of a framework on governance and risk management require - ments to provide guidance on how to manage loan origination structures has been an impor - tant factor in the development of expertise in the sector, not only at the CSSF, but also within Luxembourg’s multi-layered fund services eco - system, which includes, inter alia, administra - tors, law firms, auditors and depositaries. The expertise that the Luxembourg market has built in loan investment and direct lending funds over more than a decade reflects the experience of regulators and service providers and the skills available in the market – the result of a conscious and deliberate strategy to develop market share.
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