Fund Finance In Luxembourg : The Essentials

Luxembourg - overview

Luxembourg ranks as the largest EU fund domicile jurisdiction and the second largest fund domicile jurisdiction globally.

The EU Directive 2002/47/EC on financial collateral arrangements (the Directive) was implemented in Luxembourg with the law of 5 August 2005 on financial collateral arrangements (the Financial Collateral Law). In enacting the Financial Collateral Law, Luxembourg seized the opportunity to implement a modern security interests law with a scope broader than the Directive and with enhanced creditor protection, a move which has led to emergence of Luxembourg's reputation as a secure, global domicile for financing transactions.

The result is an attractive, secure legal framework that works strongly to the benefit of secured finance parties in transactions involving Luxembourg obligor corporate and fund structures granting security and, consequently, fund promoters seeking investment financing solutions.

What is a subscription credit facility?

While originally developed as a mechanism for funds to 'bridge' a funding gap when making an investment, thereby eliminating the risk of any shortfall and providing the fund with certainty that the requisite funds would be available to it at the moment of investment, they are increasingly used in a broader investment context for more general purposes, such as providing debt or bridging debt refinancing, funding follow-on investments or bridging co-investments.

Subscription credit facilities are attractive to both lenders and funds for a variety of reasons, the most notable advantages being:

they historically have a low track record of default; the credit risk of a lender is not dependant on the value of the underlying assets of the fund/group, but on the uncalled capital commitments of the investors of the fund, which offers the lender a lower credit risk and greater degree of comfort; they allow for enhanced certainty of and quick access to funding, as the fund does not need to wait until drawdown following a capital call to investors to obtain funds needed to capitalise on an investment opportunity; they reduce the administrative burden of the fund (and investors) by reducing the need for and frequency of capital calls; they allow for more advantageous pricing, lowering the cost of borrowing for the fund, as subscription credit facilities are typically uncommitted facilities with no commitment fees payable to the lender; and they can be used to enhance the returns...