The European Parliament’s Committee on Economic and Monetary Affairs (the “ECON”) published February 2, 2023, proposed text of AIFMD 2. AIFMD 2 will both give certainty and take away flexibility for credit funds, in this instance, primarily at the expense of open-end loan origination AIFs.
What to Expect
Based on the most current text:
- All loan origination funds will have to adopt internal credit procedures, subject to annual review
- Loans to UCITs and insurance companies will be restricted
- Loans to certain affiliates will be prohibited
- The costs of lending will need to be made more transparent to investors
- Secondary resales of loans by the Fund may be restricted to 95% of the AIF’s position, subject to exceptions
- Origination to distribute will be prohibited
- AIFMs must utilize closed-end funds and may not use open-end loan origination funds unless the redemption policy and the portfolio’s liquidity are well-aligned
The Most Recent Text
The proposed text submitted to Parliament differs from that prepared by the European Commission in some respects that are important to funds that originate loans.
The table below shows the provisions of AIFMD that will be amended by AIFMD 2 only as applied to Loan Origination Funds, the text as proposed originally by the Commission, and the most current compromise text now before Parliament. Foley offers its interpretation of the new text.
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Amendment Proposed |
Proposed Text from the Commission from November 25, 2021 |
On February 2, 2023, the European Parliament’s Committee on Economic and Monetary Affairs published proposed new text of AIFMD 2
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Foley’s POV |
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Add text in Article 4(1)
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None |
(ag) ‘professional investor’ means an investor which is considered to be a professional client or may, on request, be treated as a professional client within the meaning of Annex II to Directive 2014/65/EC; (apa) ‘loan origination’ means the granting of loans by an AIF as the original lender; (apb) ‘shareholder loan’ means a loan 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 loan cannot be sold to third parties independently of the capital instruments held by the AIF in the same undertaking. (apc) ‘loan-originating AIF’ means an AIF whose principal activity is to originate loans and for which the notional value of its originated loans exceeds 60% of its net asset value; (apd) ‘capital’ means aggregate capital contributions and uncalled committed capital, calculated on the basis of amounts investible after deduction of all fees, charges and expenses that are directly or indirectly borne by investors;
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Loan granting as the original lender alone is subject to the new rule making 60% test to distinguish a lending “sleeve” from a lending AIF |
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Article 15 is amended as follows: (a) in paragraph 3, the following point (d) is added:
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(d) for loan originating activities, implement effective policies, procedures and processes for the granting of credit, for assessing the credit risk and for administering and monitoring their credit portfolio, keep those policies, procedures and processes up to date and effective and review them regularly and at least once a year. |
(d) for loan originating activities, other than in respect of shareholder loans where such loans do not exceed in aggregate 150% of the capital of the AIF, implement effective policies, procedures and processes for the granting of credit, for assessing the credit risk and for administering and monitoring their credit portfolio, keep those policies, procedures and processes up to date and effective and review them regularly and at least once a year. |
Credit procedures required by all loan origination AIFs; subject to annual review |
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(b) the following paragraphs 4a to 4e are inserted between the paragraphs 4 and 5: 4a. |
(a) 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 where the borrower is one of the following:
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No change
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Now a two-pronged test where the 20% test is based on money in the ground and commitments |
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New 15.4(a) |
(a) a financial undertaking within the meaning of Article 13(25) of Directive 2009/138/EC; |
No change |
Certain insurance companies are limited to borrowing 20% |
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New 15(a)(4)(b) |
(b) a collective investment undertaking within the meaning of Article 4(1), point (a), of this Directive or within the meaning of Article 1(2) of Directive 2009/65/EC. The restriction set out in the first subparagraph shall be without prejudice to the thresholds, restrictions and conditions set out in Regulations (EU) 2015/76050, (EU) 345/201351 and (EU) 346/201352. 4b. The investment limit of 20% laid down in paragraph 4a shall: (a) apply by the date specified in the rules or instruments of incorporation of the AIF; (b) cease to apply once the AIF starts to sell assets in order to redeem investors’ units or shares after the end of the life of the AIF; (c) be temporarily suspended for up to 12 months where the AIF raises additional capital or reduces its existing capital |
No change |
UCITS are limited to borrowing 20% |
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New 15.4c |
4c. The application date referred to in paragraph 4b, point (a), shall take account of the particular features and characteristics of the assets to be invested by the AIF, and shall be no later than half the life of the AIF as indicated in the AIF’s constitutive documents. In exceptional circumstances, the competent authority of the AIFM, upon submission of a duly justified investment plan, may approve an extension of this time limit by no more than one additional year. |
No change |
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New 15(a)(4)(aa) and new 15(a)(4)(b) |
None |
(aa) an entity within the same group as the AIFM as defined in Article 2(11) of Directive 2013/34/EU of the European Parliament and the Council30, except where that entity is a financial undertaking that exclusively finances borrowers that are not mentioned in points (a), (b) and (c) of this paragraph; (b) its depositary and delegates of its depositary;
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Added prohibitions against loans to AIFM or Depositary |
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15(a)(4)(da) |
None
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4(da) The proceeds of the loan, minus the fees for the administration of the loan, shall be attributed to the fund in full. All costs and expenses linked to the administration of the loan shall be clearly disclosed in accordance with Article 23 of this Directive |
Adds PPM disclosure of loan administration expenses |
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New 15.4.d |
d. The AIF shall not grant loans to the following entities: (a) its AIFM or the staff of its AIFM; (b) its depositary; (c) the entity to which its AIFM has delegated functions in accordance with Article 20. |
The AIF shall not grant loans to the following entities:
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Additional prohibited loan |
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New 15.4.e |
4e. An AIFM shall ensure that the AIF it manages retains, on an ongoing basis and until maturity, 5% of the notional value of the loans it has originated and subsequently sold on the secondary market. The requirement set out in the first subparagraph does not apply to the loans that the AIF has purchased on the secondary market or where one of the following applies: a) the sale of the loan is necessary for the AIF not to be in breach of its mandate or of one of its investment or diversification rules and such potential breach is unintentional on the part of the manager, for instance as a result of the exercise of subscription or redemption rights; b) the disposal is necessary as a result of the Union sanctions; c) the AIF needs to dispose of the loans in order to redeem investors’ units or shares as part of the wind down of the AIF.
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4e. An AIFM shall ensure that the AIF it manages retains, on an ongoing basis and until maturity, 5% of the notional value of the loans it has originated and subsequently sold on the secondary market. The requirement set out in the first subparagraph does not apply to the loans that the AIF has purchased on the secondary market or where one of the following applies:
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Asset retention on resale, subject to exceptions |
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15.(a)(4)(ea) |
None |
Member States shall prohibit AIFMs from managing AIFs whose investment strategy is to originate loans with the sole purpose of transferring those loans to third parties (“originate-to distribute”).
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New prohibition on origination to distribute |
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Article 16, insert new 2(a) |
2a. An AIFM shall ensure that the AIF it manages is closed-ended if the notional value of its originated loans exceeds 60% of its net asset value. |
An AIFM shall ensure that the loan originating AIF it manages is closed-ended when the AIFM is not able to demonstrate to the competent authorities of its home Member State that the AIF has a sound liquidity risk management system that ensures the compatibility of its liquidity management system with its redemption policy.
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Liquidity robustness mandated for open-end funds |
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16(2)(aa) |
None |
2aa. ESMA shall develop regulatory technical standards as regards the assessment by competent authorities whether a loan-originating AIF has a sound liquidity management system and may maintain an open-ended structure, having regard to the underlying loan exposure, average repayment time of the loans and overall granularity and composition of AIF portfolios. In drawing up those regulatory technical standards, ESMA shall consider whether that assessment should include specific liquidity management tools including those set out in points 1 and 2 of the list set out in Annex V and also whether such AIFs should be subject to any additional disclosure as regards the specificities of loan-originating funds and their use of liquidity management tools in addition to the requirements set out in paragraph 2b.
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Article 23, insert new 4(d) |
(d) originated loan portfolio; |
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