, Private Debt Leader at EY gives a brief update.
On 16 May 2022, the rapporteur of the ECON Committee of the European Parliament (“EP”) published its report on the European Commission proposal for amendments to the Alternative Investment Funds Management (AIFM) and Undertakings for the Collective Investment in Transferable Securities (UCITS) directives. The reports propose a number of changes to the first draft published in November 2021, notably with regard to the regimes applicable to liquidity management tools, delegation, depositaries and loan-originating funds.
The report clarifies that the AIFM Directive is not a directive regulating specific investment products but also defines loan origination as the granting of loans by an Alternative Investment Fund (AIF) as the original lender. In order to increase legal certainty, the report establishes a clear distinction between loans and shareholder loans which are defined as loans granted by an AIF to an undertaking in which it holds directly or indirectly at least 5 % of the capital or voting rights, where the loans cannot be sold to third parties independently of the capital instruments held by the AIF in the same undertaking. Indeed, AIFs granting shareholder loans are exempt from implementing effective policies, procedures and processes for the granting of credit, for assessing the credit risk and for administering and monitoring their credit portfolio, keeping those policies, procedures and processes up to date and effective and reviewing them regularly and at least once a year.
On the other hand, the report proposes to extend the prohibition for a loan-originating AIF to grant loans to entities and staff belonging to the group of the AIFM managing the loan-origination fund as well as delegates of the depositary. The report also clarifies that the 20% concentration limit of loans issued to any single borrower is to be calculated on the basis of the AIF’s capital, commitments, or overall subscriptions.
The minimum retention of 5% of loans originated is replaced by a prohibition for the AIF to follow an investment strategy under which loans are originated with the sole purpose of selling them. The quantitative threshold (value of originated loans exceeding 60% of the AIF’s net asset value) triggering the obligation to structure a loan-originating fund as a closed-ended structure and possibly causing operational issues is replaced by an assessment that the AIF should have sufficient liquidity robustness to meet redemptions. Technical standards will be developed to clarify the criteria to be used by the National Competent Authorities to determine whether or not the AIFM has demonstrated that the AIF has robust liquidity management.
While these amendments make sense, there is no guarantee that they will be fully reflected in the final text. On-going discussions will continue at the level of the Council of the European Parliament to reach a compromise on important points such as notably the leverage cap and the rules applicable to Special Purpose Vehicles (SPVs) from which loan-originating funds may purchase loans (in order to mitigate risks of circumvention of the new regime).
Directives 2011/61/EU and 2009/65/EC