Loan document conditions

Standard forms and documentation

What standardized forms or terms are commonly used to prepare bank loan documentation?

International financing transactions generally follow the sampling standards of the banks granting the credit and contain the bulk of the terms and conditions of the contractual arrangement. An Anglo-Saxon lender would follow LMA standards, while German and French banks would follow their model used in domestic transactions. The reference to Luxembourg law is rather limited in these agreements, but serves to comply with the mandatory and public order provisions in force in Luxembourg. When foreign lenders have established their operations or a branch in Luxembourg, the LMA standards can be used with substantial reference to Luxembourg law. However, the use of this type of standard LMA agreement under Luxembourg law is very limited on the market.

The documentation of bank loans used in Luxembourg is mainly prepared on the basis of the standardized conditions of the LMA. The Association of German Banks provides a framework contract which is used from time to time.

Pricing and interest rate structures

What are the typical pricing or interest rate structures for bank loans? Do pricing or interest rate structures change if the bank loan is denominated in a currency other than the national currency?

Interest rate structures will depend on the types of loans and the lenders’ banking practices. A fixed rate is preferred in financing backed by fixed assets (real estate, equipment, real estate investments), while variable rates are used in most business lending transactions. This will generally be a US structure with a base rate or LIBOR plus a spread set over a specific period. Mandatory costs can also be included in the interest calculation to reflect the cost of the loan. Floating interest rates generally refer to a benchmark rate such as LIBOR for the US dollar, British pound, Swiss franc, yen or EURIBOR for euro denominated loans, or occasionally NIBOR (krone Norwegian), CIBOR (Danish krone) and STIBOR (Swedish krona) and a margin. In private equity transactions, exit fees are also common and ensure a minimum tax return for lenders on the loan transaction.

Have procedures been adopted in the documentation of bank loans in your jurisdiction to replace LIBOR as the benchmark interest rate for loans?

Since the investigations into the LIBOR manipulations and the result thereof in the conviction of some traders and the imposition of fines on large financial institutions, there has been a discussion of changing the benchmark interest rate. . Indeed, given the latest announcements from the Financial Conduct Authority, the use of LIBOR could no longer be ensured after the end of 2021. Thus, even if this remains, for the moment, an academic discussion in Luxembourg, LIBOR is so ingrained in the daily activities of users of financial services in Luxembourg that they should start preparing for the transition to an alternative benchmark interest rate.

Other determinants of loan returns

What other determinants of bank loan yield are commonly used?

Credit facilities are not issued at a discount, but price floors may be instituted with respect to the determination of interest rates. Zero floor provisions are often included to avoid negative interest rates. Tranche B loan prices may be more diversified and may include equity conversion rights or additional warrants with an attractive price conversion to enhance the target return.

Yield protection provisions

Describe any yield protection provisions typically included in bank loan documentation.

When bank financing is set up on the basis of an LMA-type agreement governed by foreign law, the following yield protection provisions are usually included in the loan agreement:

  • increased expense allowance to cover costs that lenders may incur as a result of:
    • the introduction or any change in (or in the interpretation, administration or application of) any law or regulation; or
    • compliance with any law or regulation subsequent to the date of the financing agreement (for example, according to Basel III, CRD IV or CRD V, see question 9);
  • repair amounts or prepayment charges;
  • tax increase provisions; and
  • breakage fees.

The mark-up provisions are in most cases irrelevant in Luxembourg since there is no withholding tax on interest payments in Luxembourg, but aim to protect any reclassification of interests in the distribution of profits when the rates are made up of a high fixed and variable part coming from the borrower’s profits.

Accordion arrangements and sidecar financing

Do bank loan agreements generally allow additional debt that is secured on a pari passu basis with senior secured bank loans?

When bank financing is set up on the basis of an LMA-type foreign law agreement and in particular in acquisition financing, accordion facilities can be included without commitment. Depending on the terms negotiated, this debt may be guaranteed pari passu. To the extent permitted, additional debts may be contracted outside the financial package and will be, depending on the situation or the negotiation, either super senior secured (DIP financing), pari passu secured or second-tier secured. A specific agreement between creditors will be put in place to organize the realization of sureties and the distribution of the proceeds. Under the Financial Guarantees Act, a higher or lower ranking collateral can only be granted with the express consent of the existing beneficiary of a collateral.

Financial maintenance commitments

What types of financial sustaining covenants are typically included in bank loan documentation, and how are these covenants calculated?

When bank financing is set up on the basis of an LMA type contract governed by foreign law, the following financial maintenance clauses are generally included in the loan contract:

  • equity / debt ratio;
  • loan-to-value ratio, indicating the maximum percentage of the loan compared to the value of an asset pool;
  • an interest coverage rate, indicating the minimum capacity of the debtor to pay its interest obligations during a certain interest period; and
  • capital expenditure indicating the maximum amount of capital expenditure.

In the event of a breach of a financial sustaining clause, equity redress rights are included in the loan documentation allowing sponsors to inject equity into the structure to remedy such breach.

In Luxembourg law governed by simple loans, financial maintenance covenants will generally be limited to loan / value covenants and interest coverage ratios.

Other alliances

Describe any other covenants restricting the operation of the debtor’s business typically included in the bank loan documentation.

The covenants models follow the type of loan sample used in the transaction, in particular the common law or civil law orientation of the contract documentation. The notions of good faith in civil law imposed by Luxembourg statutory laws require the adoption of fair and responsible practices on the part of lenders and borrowers. Contractual documentation may reinforce or add certain obligations of borrowers not provided for by law, such as restrictive covenants limiting the payment of dividends, disposal of assets, change of control and negative collateral preventing them from granting additional collateral. or lower-ranking securities, or incur new debt.

Compulsory prepayment

What types of events typically trigger mandatory prepayment requirements? Can the debtor reinvest the proceeds from the sale of assets or a loss in his business instead of prepaying bank loans? Describe other common exceptions to mandatory prepayment requirements.

When bank financing is set up on the basis of an LMA-type agreement governed by foreign law, the mandatory early repayment is usually triggered by events such as a change of control, unauthorized payments of dividends by the borrower to the sponsor, sale of assets and any other event which benefits the borrower to the extent not authorized by the loan facility or otherwise not authorized by the lender. In the case of specific loans, contractual arrangements may provide that available cash products exceeding certain pre-agreed thresholds trigger certain prepayment obligations (cash transfer provision).

Compensation of the debtor and reimbursement of costs

Describe generally the obligations to indemnify and reimburse the debtor’s expenses, with reference to any common exceptions to these obligations.

In simple loans governed by Luxembourg law, a borrower will indemnify the lenders for all costs, expenses or losses incurred by the lender in connection with:

  • investigate any event that it reasonably believes to be an event of default;
  • act or rely on any advice, request or instruction that it reasonably believes to be genuine, correct and duly authorized; or
  • give instructions to lawyers, accountants, tax advisers or other professional advisers or experts as permitted by the loan agreement.

A Luxembourg judge may, however, reduce the amount of these indemnities if they are considered to be punitive damages.

In simple loans governed by Luxembourg law, a borrower will indemnify the lenders for all costs, expenses or losses incurred by the lender in connection with: