LUXEMBOURG Trends and Developments Contributed by: Silke Bernard, Melinda Perera and Adrien Timmermans, Linklaters LLP
with them, but in other cases alongside them. We are also seeing interaction and joint ventures between funds and banks, including the latter providing financing to funds to conduct loan origination, but also collaboration involving dif - ferent levels of financing. For example, banks may provide senior debt directly secured against the assets, while alter - native lenders including credit funds provide mezzanine financing or payment-in-kind struc - tures, taking a bigger risk and receiving a higher return. Among areas of collaboration, we also see banks originating loans for which funds are participating in the syndication. Meanwhile, traditional banks are also setting up their own funds in order to provide credit at a different level. Alternatively, they are originat - ing transactions from within their client base for which funds are providing the credit, as a so- called fronting bank, a common practice in some European markets – eg, Germany. While com - petition between banks and funds does exist in some areas, in a rapidly expanding market, the areas of potential collaboration are growing. Luxembourg’s Updated Securitisation Framework Securitisation plays a pivotal role in the loan origination sector. With the enactment of the 2004 Securitisation Law, Luxembourg has established itself as a leading jurisdiction for securitisation in Europe. This position was further reinforced by the updates implemented in February 2022, which introduced a revised framework that enhances both flexibility and legal certainty. Supported by a robust private credit dynamic, the updated legislation serves as an excellent
structuring tool for private credit providers by enabling them to: • efficiently raise funds (in all forms, such as notes, loans, etc) to execute investments in diverse forms, capitalising on the enhanced flexibility offered by the 2022 amendments to Luxembourg’s 2004 Securitisation Law; and • utilise innovative options and features, such as compartmentalisation and active manage - ment, to effectively deploy their investments in various formats. Securitisation is an attractive strategy employed by private credit funds, traditional lenders such as banks and hybrid models where private credit funds collaborate with traditional lenders. It is also utilised when traditional lenders leverage platforms established by private credit funds. Governance, Risk Management and Market Expertise One of the key characteristics of Luxembourg’s private credit sector and the regulatory frame - work within which it operates is its long-standing focus on governance. This is a critical aspect as regional and international institutions examine the implications for financial system stability and regulatory scrutiny of the activity on non-bank financial intermediaries – sometimes dismissed, often by non-experts, as “shadow banking”. Over many years, an extremely sound gov - ernance and risk management and mitigation framework has been built up in the Grand Duchy of Luxembourg under the close supervision of the CSSF. In practice, it is this model that is now being emulated at European level to strengthen the robustness of the non-bank lending market, taking advantage of the experience of Luxem - bourg’s industry players – and of its financial regulator.
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