Trade Alert - September 2017, Issue 45


Luxembourg (an EU member country since 1958) has become an attractive prospect for finance companies seeking a new home following the UK’s decision to leave the EU. Historically, the iron and steel industry was the driving force of the Luxembourg economy, but the Grand Duchy has rebranded itself over the last 50 years as an international financial hub, with capabilities in offshore Renminbi trading, green finance and Fintech. As the UK continues to negotiate its position in Europe, Luxembourg will compete with, amongst others, Dublin and Frankfurt to strengthen its position in the market. Earlier this year, investment bank JPMorgan identified the country as a European centre where it will increase its presence after Brexit.

The country’s business friendly reputation and determination by Prime Minister, Xavier Bettel, to focus on financial services, has secured Luxembourg’s position in the future endeavours of M&G (the asset management arm of Prudential), FM Global and Hiscox, who have all made clear their intentions to setup divisions or subsidiaries in Luxembourg.

Luxembourg is also a popular choice of jurisdiction for funds investing in the European secondary loan market, due to its favourable tax regimes. A KPMG report published earlier this year states that over the last 5 years the number of assets managed by debt funds in Luxembourg has increased by a factor of 6. In support of this, figures compiled by the ‘ALFI’ (Association of the Luxembourg Fund Industry) as of 31 July 2017 cite that EUR 3,957.6bn of net assets are under management in Luxembourg funds.

Chief Executive of the Luxembourg Stock Exchange Robert Scharfe, stated that “You will not find a more international financial centre on the continent than Luxembourg.

This alert describes some of the issues to be aware of when acquiring loans on the secondary market made to a borrower located in Luxembourg.


The Luxembourg Act of 5 April 1993 on the financial sector (the "Financial Sector Act") sets out the license requirements to carry out, amongst other things, professional lending activities in the financial sector.

The Financial Sector Act does not require a license for the acquisition of debt, nevertheless, a banking license may be needed if the transfer obliges the new lender to fund the borrower after the transfer (e.g. in the case of an acquisition of a revolving credit facility). To be specific, the purchase of the loan (including a revolving loan) in itself does not require a licence but funding the borrower thereafter would. Furthermore, it is generally advisable to provide the Commission de Surveillance du Secteur Financier (“CSSF”) with a description of, and request specific clearance from the CSSF in relation to, a transaction which will require funding to a borrower based in Luxembourg.

The Financial Sector Act also expressly states it does not apply to securitisation vehicles (Article 1-1(2) (p) of the Financial Sector Act) but Luxembourg securitisation vehicles continually issuing securities to the public do require a separate CSSF authorisation under Luxembourg law. This license is only required if securities are continually issued to the "public".

Apart from securitisation vehicles, a number of other structures are excluded from the application of the Financial Sector Act and may engage in lending operations without the need to obtain a license under the Financial Sector Act. These structures include undertakings for collective investment, specialised investment funds, pension funds and investment companies in risk capital.

Foreign regulated entities carrying out lending activities in Luxembourg and/or Alternative Investment Funds (AIFs) established in another Member State or a third country, may in principle, originate loans in Luxembourg under the law of 12 July 2013 on Alternative Investment Fund Managers (AIFMs).


The Luxembourg Civil Code generally recognises three methods for transferring a loan: subrogation contractuelle, cession de créances and novation:

  1. Under Article 1250(1) of the Luxembourg Civil Code, a person who pays the debt of another person (e.g. a transferee paying a transferor) is substituted for the original creditor. The (contractual) act of subrogation contractuelle must be express and happen simultaneously with the payment. It has the same effect as an assignment under Luxembourg law. This method of transfer is usually used in the context of factoring operations.
  2. A cession de créances, or assignment is akin to an English law assignment and operates simply by assigning the rights of the original creditor, or assignor, to the new creditor, or assignee.
  3. A novation again is akin to an English law novation whereby the debtors consent is required (which is often given in advance under a loan agreement) to extinguish the existing obligation and replace it with a new, identical, one in favour of the transferee (Article 1271 of the Luxembourg Civil Code).

Participation Agreements are used from time-to-time in the context of financial transactions involving a Luxembourg element. They are, however, usually governed by foreign law.

security and trusts/agency

While the legal concepts of a trust, or agent (as it is known in common law jurisdictions), does not exist under Luxembourg law Article 2(4) of the Luxembourg Act of 5 August 2005 on financial collateral arrangements, provides expressly that financial collateral may be granted by a person acting on behalf of the beneficiaries of the financial collateral, a fiduciary or a trustee to secure the claims of third party beneficiaries, present or future (e.g. the lenders from time to time under a syndicated loan), provided that such third party beneficiaries are identified or can be identified. Under this arrangement, lenders can transfer their debt while the security is retained by a security trustee/agent.

Security and methods of transfer

Where a security trustee/agent structure is not being utilised, when transferring by means of a cession de créances (assignment) (Article 1692 of the Luxembourg Civil Code) or subrogation contractuelle  (Article. 1250(1) of the Luxembourg Civil Code), existing security and mortgages are automatically transferred to the new lender. This stems from the principle under Luxembourg law whereby the accessory (i.e. the security) follows the principal (i.e. the loan).

If the transfer is via novation, the security will only pass on to the new lender if the parties expressly provide for this (Article 1278 and 1281 of the Luxembourg Civil Code). In the absence of such provision, the security will extinguish.

Undertakings which are not considered to be accessory/ancillary (accessoires) such as an independent guarantee (garantie autonome) should be considered separately. As the guarantee and the main contract are considered to exist independently of each other, an additional, separate assignment by the original beneficiary of the guarantee to the new beneficiary is required.


Borrower's consent is required in the case of novation as it constitutes a modification of a material clause of the original loan. As regards subrogation contractuelle and cession de créance, no borrower consent is required.

With respect to a transfer by subrogation contractuelle, a notification to the borrower is advised as it prevents the borrower from continuing to make payments to the transferor.

If transferring a claim by cession de créances, a notification to the borrower is necessary in order for the transfer to be valid and enforceable against third parties (Article 1690 of the Luxembourg Civil Code).


In the case of (i) interest payable on loans made to domestic or foreign lenders or (ii) the proceeds of a claim under a guarantee or the proceeds of enforcing security, no withholding tax should be levied in Luxembourg unless (a) the interest is not at arm’s length or (b) the interest is paid to an individual resident  in Luxembourg.

No stamp duty should be payable upon transfer of such loans except in case of (i) voluntary registration of documents, (ii) documents appended to a deed which is mandatorily subject to registration or (iii) documents lodged with the notary for his records (déposés au rang des minutes du notaire).

No transfer tax should apply in Luxembourg (assuming the loans are not secured over certain assets (e.g. real estate properties located in Luxembourg). The transfer of real estate property situated in Luxembourg is subject to proportional registration duties, irrespective of the origin of the buyer.

Special Note

With special thanks to Antoine Laniez  and Jad Nader at NautaDutilh Avocats Luxembourg, who assisted us with this Trade Alert.


Espírito Santo International S.A., a holding company owning Rio Forte Investments S.A. and an indirect interest in Banco Espírito Santo (BES) entered into bankruptcy proceedings in Luxemburg on 27 October 2014.  Rio Forte, also entered into bankruptcy proceedings in Luxembourg on 8 December 2014.

The receivers of these entities have requested that all claims in connection with RFI or ESI are filed by 30 September 2017, and have indicated that this date is unlikely to be further extended.  Please note that if you have already filed a claim it is not necessary to refile, however if the claim has been bought or sold the transfer process requires that the claim is withdrawn and refiled in the name of the buyer.

Click here for the notices from the receivers of RFI and ESI

We are working with local counsel in Luxembourg to file claims.  If you require assistance or further information please do let us know as soon as possible.


Following the collapse of Iceland’s coalition government, Prime Minister Bjarni Benediktsson has called for a snap election on 28 October 2017, this is the country’s second election in less than a year.

Having faced economic crisis in 2008 the country has steadily rebuilt its economy – Arion Bank (the domestic arm of failed Kaupthing Bank), has seen net earnings of ISK 10.5bn in the first 6 months of 2017, with a return on equity of 9.7% compared with 9.5% for the first 6 months of 2016.   However, in light of the political uncertainty, Iceland’s main index has slipped by 5% pairing the indexes growth in 2017 to just 2%.

Nevertheless, Bloomberg reports that Iceland is working towards getting its companies listed on global indexes run by MSCI and FTSE. It is anticipated that a decision from MSCI will be made soon, whilst the FTSE will confirm its decision at some point in 2018, acceptance of Icelandic companies onto the global indexes will help increase the interest of foreign investors and boost the country’s growth.

***NEW ***




On the 25 September 2017, a number of changes to the LMA’s suite of documents for secondary trading went live. Broadly speaking, the changes relate to:

  1. LMA Standard Terms and Conditions (the “Standard Terms”)
  2. the section of the Standard Terms which deals with ‘Interest and Accrued Fees’;
  3. the ‘Settlement Amount calculation’; and
  4. the ERISA language.
  5. LMA form of Funded Participation
  6. a grantor now need only sign a transfer certificate whereby it agrees to the transferring of the rights under the participation from the current participant to a third party transferee, once the grantor has satisfied all of its KYC or other similar checks on such third party transferee; and
  7. as above, language addressing the New Fiduciary Rule has been incorporated to cover the period the participation is in force.
  8. LMA Secondary Debt Trading Documentation User Guide (the “User Guide”)
  9. amongst other things, the updated User Guide clarifies that any permanent repayment of principal satisfied via a non-cash distribution (e.g. a debt-for-equity swap) will not count as a ‘Permanent Reduction’ for the purposes of the Standard Terms; and
  10. the User Guide also makes reference to the removal of the ‘LMA Pricing Panel’ concept in the version of the Standard Terms which came into force on 27 June 2017.

Click here for a more detailed note on the changes.



Russian banks facing crisis as Bank Okrite FC and B&N Bank seek assistance from the central bank just three weeks apart.

On 21 September 2017 Russia’s central bank confirmed that it would nationalise B&N Bank in the second bailout of a private bank this month. Whilst B&N Bank is not on the list of “systemically important banks” its size (once merged with Rost Bank – it will be the 8th largest lender in Russia) influenced central banks decision to step in and prevent the bank from failing.

Earlier this month Bank Okritie FC became the first Russian bank to be rescued by the country’s newly created Banking Sector Consolidation Fund (“BSCF”), a state fund established by the Central Bank of Russia to help restore confidence in the country’s banking system. BSCF is taking a 75% stake in the lender and is anticipated to manage its operations for the next year.

Having dramatically climbed the ranks of Russia’s banking system to become the country’s largest private lender by assets in just a few years, Otkritie suffered a swift reversal of fortune in June when Reuters reported a surprise ratings downgrade from Moody’s. The lender subsequently saw its depositors withdraw approximately USD 7.4bn of funds, roughly 30% of the bank’s total assets.

Otkritie now faces allegations of falsified accounts and market manipulation, with the governor of the Bank of Russia describing the lender’s substantial holding of Russian Eurobonds as enabling it to “sugarcoat its financials by manipulating the market price”. In addition, according to local press reports, Russia’s Federal Antimonopoly Service is now investigating alleged unfair information sharing between the bank and local broker BCS.

Holders of Otkritie’s subordinated eurobond notes have seen the value of their assets plummet in value. On 8 September 2017, the Russian Finance Ministry confirmed that about USD 1.14bn of the bank’s subordinated debt is anticipated to be “written off” as part of the restructuring process.

  1. TOYS R US

Having struggled for some time to keep-up with the shift to online shopping, Toys R Us have filed for Chapter 11 Bankruptcy protection, sighting more than USD 5bn of debt. Bloomberg reports that much of this debt can be attributed to a USD 7.5bn leveraged buyout in 2005, in which Bain Capital, KKR & Co and Vornado Realty Trust provided Toys R Us with debt to take the company private.

As it approaches the festive period, the toy retailer does not intend to close any of its stores and instead, plans to continue operations whilst it restructures its liabilities using a court approved USD 3bn debtor in possession loan from JP Morgan Chase & Co.

The company was downgraded by Fitch and S&P Global earlier this month.

  1. SEADRILL Ltd.

The offshore drilling company Seadrill filed for Chapter 11 Bankruptcy on 12 September 2017 in order to restructure its debts. Seadrill has experienced difficulties due to the crash in crude oil prices and the Financial Times has reported a 99% fall in shares from their peak in 2013.

The Financial Times, also reports that the Chapter 11 filing includes a restructuring agreement and an investment agreement which will reportedly bring in more than USD 1bn in new funding. Although the proposed reorganisation plan has achieved significant levels of support, a report from Debtwire suggests that a small group of unsecured creditors may be looking to oppose the reorganisation plan.

In its petition, the company listed a range from USD 10bn to USD 50bn in debt and assets. Seadrill expects to emerge from Chapter 11 protection in 6 to 9 months.


Earlier this month, embattled Croatian food retailer Agrokor d.d. posted on the company’s website an update regarding the group’s litigation and enforcement proceedings. Most notably, the update mentions that Sberbank has now commenced further legal action againt the group with the aim of enforcing against Agrokor’s property in Serbia and Bosnia and Herzegovina.

Debtwire reports that Ivica Todoric, former owner and chairman Agrokor, may now be planning to sue the Croatian government over the nationalisation of the company’s private property. Such claims may be brought on the basis that the adoption of Lex Agrokor is unconstitutional.

This speculation comes after the announcement that the first draft settlement proposal for creditors of indebted Croatian food company Agrokor is expected to be ready in November. Reuters reports that a permanent creditor council is also expected to be set up around this time.

It is expected that the company will announce its revised financial statements for 2016 during the course of 29 September 2017.

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