AIFMD II – European Commission proposed directive, November 2021 – Loan origination

Since the growth of loan originating funds in the EU internal market is seen as a positive development, amendments and additions seek to remove unnecessary risk retention requirements and avoid creating product-specific rules. Favouring loan originating funds is also a means to increase financing to SMEs, green projects and other companies. The following changes and amendments to the AIFMD are included in the Commission proposal.

  • AIFs have a right to originate loans and trade these loans on the secondary market.
  • AIFMs and their staff cannot be granted loans from loan-originating AIFs they manage.
  • AIFs’ depositaries are prohibited from receiving loans from AIFs they service.

Entities to which the AIFM has delegated one or more of its AIFM functions cannot receive loans originated by the AIF.

AIFs originating loans shall be closed-ended if the notional value of their originated loans exceeds 60% of its NAV.

For loan granting activities, the AIFM shall implement effective policies, procedures and processes for the granting of credit, assessing credit risk and administering and monitoring their credit portfolio, keep those policies, procedures and processes up to date and effective. and review them regularly, at least once a year.

An AIFM shall ensure that a loan granted to any single borrower by the AIF it manages does not exceed 20% of the AIF’s capital in cases where the borrower is one of the following:

  • A financial undertaking within the meaning of article 13(25) of Directive 2009/138/EC (Solvency II).
  • An AIF within the meaning of article 4(1), point (a), of the Solvency II directive.

A UCITS within the meaning of article 1(2) of Directive 2009/65/EC (UCITS IV).

This restriction is without prejudice to the thresholds, restrictions and conditions of the EUVECA, ELTIF and EUSEF regulations.

The investment limit of 20%:

  • Applies by the date specified in the rules or instruments of incorporation of the AIF.
  • Ceases to apply once the AIF starts to sell assets to redeem investors’ units or shares after the end of its life.
  • May be temporarily suspended for up to 12 months when the AIF raises additional capital or reduces its existing capital.

The application date of the investment limit shall be set in the rules or instruments of incorporation of the AIF, taking into consideration the particular features and characteristics of the assets in which the AIF is to invest. However, the application date of the investment limit, as specified in the rules or instruments of incorporation of the AIF, should not be later than halfway through the life of the AIF indicated in its constitutive documents. In exceptional circumstances, the regulatory authority of the AIFM, upon submission of a duly justified investment plan, may approve an extension of this time limit not exceeding one additional year.

AIFMs shall ensure that AIFs they manage retain, on an ongoing basis, 5% of the notional value of the loans they originate and subsequently sell on the secondary market. This requirement does not apply to loans the AIF has purchased on the secondary market.

You can access a copy of the directive proposed by the European Commission here.

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