AIFMD II – European Parliament draft report – Loan origination

The European Parliament draft report has added two definitions:

Loan origination means the granting of loans by an AIF as the original lender. This definition is relatively narrow and funds acquiring mostly syndicated debt are excluded.

A shareholder loan is a loan granted by an AIF to an entity in which it holds directly or indirectly at least 5% of the capital or voting rights, where the loan cannot be sold to third parties independently of the investment held by the AIF in the same entity.

The European Parliament draft report refers to loan origination rather than loan granting activities. The requirements regarding effective, up-to-date and annually reviewed policies, procedures and processes for granting credit, assessing the credit risk and administering and monitoring their credit portfolio are the same as those included in the Commission proposal. However, the European Parliament draft report includes the exception that such requirements do not apply to shareholder loans that do not exceed in aggregate 150% of the NAV of the AIF.

The 20% limit of the AIF capital relating to certain types of borrowers is retained in the European Parliament draft report with the additions of commitments and overall subscriptions: “An AIFM shall ensure that a loan originated to any single borrower by the AIF it manages does not exceed 20% of the AIF’s capital or commitments or overall subscriptions where the borrower is one of the following: (…)”.

An entity within the same group as an AIFM cannot receive loans from loan originating AIFs managed by the AIFM. The restriction on loan origination to entities that are part of the same group as the AIFM may change the way some private equity-backed deals are structured, since the acquisition entity may be part of the group – in particular in US PE fund structures).

Delegates of a depositary are also prohibited from receiving loans from AIFs which have appointed such depositary. The Commission proposal refers only to the depositary, not its delegates.

The requirement to retain on an ongoing basis 5% of the notional value of loans originated by the AIF is removed in the European Parliament draft report.

AIFs should not follow an originate-to-distribute investment strategy, under which loans are originated with the sole purpose of transferring those loans to third parties. This is a different approach to risk retention than the Commission proposal, a general prohibition rather than a minimum retention requirement of 5% applicable to loans originated by the AIF and sold on the secondary market. This general prohibition does not prevent the trading of some loans on the secondary market, but the extent to which such trading is authorised would depend on the approach adopted by national regulators.

An AIF originating loans should be closed-ended if the AIFM is unable to demonstrate to the regulatory authorities of its home member state that the open-ended AIF has liquidity robustness regarding liquidity mismatches and long-term and illiquid loans – the European Commission will adopt the regulatory technical standards drafted by ESMA regarding demonstration of liquidity robustness for loan origination. This obligation may catch, for instance, AIFs with flexible and opportunistic strategies. The Commission proposal is more precise in requiring that an AIF be closed-ended if the notional value of its originated loans exceeds 60% of its NAV. 

Access the draft report of 16 May 2022 from the European Parliament here.

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