Within the framework of the economic stabilisation programme announced on 25 March 2020, a law establishing a guarantee scheme supporting the Luxembourg economy was published and entered into force on 18 April 2020 (the “Law”). The Law will allow the Luxembourg State to back loans granted by credit institutions incorporated under Luxembourg law (hereafter referred to as “banks”) to companies in an aggregate amount of up to 2.5 billion Euros.
On 21 April 2020, the Minister of Finance, together with representatives of seven major banks of the Luxembourg financial centre, has signed an agreement organising the system of these state-guaranteed loans.
The purpose of this article is to set out the main points of the Law.
Who’s eligible to be granted such state guarantee?
In principle, every commercial, artisanal or industrial company being in possession of a valid business licence as well as certain legal and natural persons exercising liberal professions (see the full list under Art. 91, al. 1, 1° of the Income Tax Law of 4th December 1967, as amended) will be eligible to fall within the scope of this new guarantee regime.
However certain types of companies are explicitly excluded from the benefit of state guaranteed loans under the Law:
- Companies, the core business of which is promotion, ownership, rental and trading of real estate; and
- Holding companies.
Under what circumstances can a company or other eligible person be granted such state guarantees?
- It must encounter temporary financial difficulties as a result of the COVID-19 crisis (i.e. companies and other eligible borrowers that were in financial hardship before the declaration of the state of emergency on 18 March 2020 will not benefit from the guarantee regime); and
- It must have been granted a credit line, investment credit or overdraft credit facility with a maximum term of six years by a bank between 18 March and 31 December 2020.
Are there any particular restrictions or limitations relating to the state backed loan itself?
- The maximum amount of an eligible loan may represent up to 25 % of the beneficiary’s turnover in 2019 or, failing that, the turnover of the last available year. Other adapted rules apply for young innovative start-ups as well as companies created only this year;
- The loan agreement must specify that reimbursement becomes immediately due, should non-compliance with the conditions foreseen in the Law be discovered; and
- If a credit event occurs within two months of the loan disbursement, the state guarantee cannot be called into play.
Does the guarantee cover the entirety of the loan?
No, it does not. The guarantee covers only 85% of the outstanding amounts (capital, interest and incidental fees included).
Does the amount guaranteed by the State change over the term of the loan?
Yes, the state guaranteed amount will decrease proportionally to the amounts outstanding under the loan agreement.
When does the guarantee come into play?
Only after the bank has exercised all amicable and, where appropriate, judicial remedies, or failing the possibility to do so, after it has summoned the borrower in a competent court for the opening of collective proceedings following a credit event, can the guarantee be called into play for the losses incurred by the bank.