Luxembourg proposes statutory protection for funded sub-participations

Bill of law no. 8813 on the protection of funded sub-participation agreements (the "Bill") aims to introduce into Luxembourg law a specific insolvency protection regime for participants in funded sub-participations involving a Luxembourg lender.

Under the proposed regime, the assets owed by the lender to the participant under the funded sub-participation, together with the related contractual obligations, would form a separate fiduciary estate (patrimoine d’affectation détenu à titre fiduciaire). Those assets would be segregated from the lender’s own estate and protected against attachment by its other creditors and against the effects of insolvency or collective proceedings affecting the lender.

The proposal is intended to address a key structural risk of funded sub-participations while supporting Luxembourg’s position in loan origination, loan syndication, private credit and secondary loan market transactions. The Bill was submitted to the Luxembourg Parliament on 30 July 2026 and has not yet been adopted by the Chambre des Députés. Its provisions may therefore change during the legislative process.

Why is the Bill important?

Under a funded sub-participation agreement, the participant typically pays the lender an amount corresponding to its participation in the relevant loan exposure. In return, the participant acquires a contractual claim against the lender in respect of an agreed share of amounts received from the borrower under the underlying loan, typically including principal and interest.

The lender remains the lender of record vis-à-vis the borrower, and the participant has no direct rights against the borrower or proprietary interest in the underlying loan solely by virtue of the sub-participation. The participant is therefore exposed not only to the borrower’s credit risk, but also to the risk that the lender becomes insolvent after receiving amounts attributable to the participant and before transferring them to it.

Under current Luxembourg insolvency law, and unless the arrangement benefits from separate security or another protective structure, the participant may rank as an unsecured creditor of the lender in respect of those amounts. The Bill is designed to remove that additional layer of lender insolvency risk for the assets falling within the proposed statutory regime.

How would the statutory protection operate?

The new regime, if enacted, would create by operation of law a statutory segregation of the relevant assets and related obligations by allocating them to a separate fiduciary estate (patrimoine d’affectation) held by the lender for the benefit of the participant.

The assets owed by the lender under the funded sub-participation would not form part of the lender’s own estate. Together with the related contractual obligations, they would constitute a fiduciary estate separate both from the lender’s general estate and from any other fiduciary estate held by it.

The assets forming that estate could not be attached by creditors of the lender other than the participant. In addition, the lender’s obligation to transfer those assets to the participant would not be affected by a reorganisation measure, insolvency proceeding or other collective proceeding concerning the lender.

Importantly, the Bill does not transfer the underlying loan or give the participant direct rights against the borrower. Its protection is directed at the assets owed by the lender to the participant, and the related contractual obligations, under the funded sub-participation. The participant would therefore continue to bear the credit risk of the underlying borrower.

Which arrangements would be covered?

The Bill defines a funded sub-participation as an agreement under which a participant assumes all or part of the risk of a loan granted by a lender to a third-party borrower by making a financial contribution available to that lender. The lender may not be a natural person.

The proposed regime is limited to funded, or cash, sub-participations. Synthetic and other unfunded risk-participation arrangements would not fall within its scope.
While it primarily targets credit institutions acting as lenders, it is intended to apply to any Luxembourg entity acting as lender under a funded sub-participation agreement, including other professionals of the financial sector and loan or debt funds.

According to the commentary to the Bill, the proposed regime is intended to apply whenever a Luxembourg lender is party to a funded sub-participation, irrespective of the law governing the agreement. This is significant for market-standard funded sub-participations governed by English law or another foreign law. However, the territorial connection to a Luxembourg lender is expressed in the commentary rather than expressly stated in the operative definition and may therefore merit clarification during the legislative process.

The Bill is also expressed to be without prejudice to the amended law of 10 July 2020 establishing a Register of Trusts and Fiduciary Contracts. Market participants should accordingly consider separately whether the application of the new regime gives rise to any registration or reporting consequences under that law.

Once the new regime enters into force, it will apply automatically to funded sub-participation agreements concluded thereafter. The Bill nevertheless provides contractual flexibility through an “opt-out” mechanism allowing the parties to exclude their agreements from the application of the law, and an “opt-in” mechanism enabling them voluntarily to submit a pre-existing agreement to the new regime. Absent such an opt-in, agreements concluded before the law enters into force would remain outside the regime.

Interaction with bank resolution and bail-in

Where the lender is an institution subject to the amended law of 18 December 2015 on the failure of credit institutions and certain investment firms (the “Luxembourg BRRD Law”), the Bill is intended to complement the existing framework. The explanatory commentary notes that Part II of the Luxembourg BRRD Law currently contains no specific protection for funded sub-participations and that, absent another protective structure, the participant may therefore be an unsecured creditor of the lender.

From the perspective of Part I of the Luxembourg BRRD Law, the bail-in tool continues to apply in accordance with EU law. However, certain liabilities are expressly excluded from bail-in, including certain liabilities arising by virtue of a “trust relationship” between an institution subject to the resolution framework, as trustee, and a beneficiary, provided that the beneficiary is protected under the applicable insolvency law.

For these purposes, the concept of a “trust relationship” is an autonomous EU law concept and is not limited to a fiducie within the meaning of the amended Luxembourg law of 27 July 2003 relating to trusts and fiduciary contracts. The Bill’s commentary refers in this respect to European Banking Authority guidance concerning Article 44 of Directive 2014/59/EU.

On the analysis set out in that commentary, the type of funded sub-participation contemplated by the Bill should create such a trust relationship between the lender and the participant because the relevant funds are allocated to the participant, may not be used by the lender for its own account and are protected in collective proceedings.

Accordingly, to the extent that the relevant statutory conditions are satisfied, liabilities arising under a funded sub-participation falling within the Bill should be treated as excluded from bail-in. This conclusion remains conditional on the requirements of the applicable resolution framework being met in the particular case and does not disapply the remainder of that framework.

What does this mean for market participants?

For the Luxembourg financial centre, the Bill is a meaningful reinforcement of the toolkit for loan origination, syndication and secondary market activity, and should improve the legal certainty of funded sub-participations involving Luxembourg lenders, particularly in the loan, private credit and structured finance markets.

Although the Bill remains subject to the legislative process, lenders, participants and arrangers may wish to begin assessing its potential impact on their transaction documentation and operating models. In particular, they should consider:

• mapping existing and pipeline funded sub-participations involving a Luxembourg lender;
• identifying which payment rights, non-cash assets and related obligations are intended to fall within the statutory fiduciary estate;
• reviewing payment, collection and account arrangements to ensure that amounts attributable to participants can be properly identified and transferred;
• checking existing provisions that characterise the relationship exclusively as one of debtor and creditor, or expressly disclaim any trust or fiduciary relationship, as these may require reconsideration if the statutory regime is to apply;
• for new agreements, deciding whether the regime should apply or whether an express opt-out is appropriate;
• for existing agreements, considering whether to opt into the regime after its entry into force and whether any amendment, consent or other contractual step would be required; and
• assessing any separate regulatory, accounting, capital, tax and registration implications arising from the structure in the circumstances of the relevant transaction.

The Bill has the potential to remove a material structural weakness of funded sub-participations involving Luxembourg lenders without requiring a transfer of the underlying loan or its related security. Its practical value will, however, depend on the final legislative text and on careful alignment between the statutory regime, the transaction documents and the operational handling of the relevant assets.