The German Federal Financial Supervisory Authority (“BaFin”) permits German regulated funds to directly grant loans.
Due to the harmonised European regulation of investment management companies and on the basis of the European principle of non-discrimination, this new BaFin administrative practice is likely to also similarly privilege EU funds which intend to grant loans to German borrowers. However, BaFin has not explicitly elaborated on this issue.
The revised BaFin position means a dramatic change for the German regulatory landscape and lending business. So far, the granting of loans – also by non-German entities – to German borrowers was highly restricted and generally considered being a regulated activity in Germany reserved for banks. For funds, BaFin previously only permitted them to acquire loans but not to grant them as collective investment management licenses did not cover direct lending business. With the new administrative practice, the granting of loans to German borrowers by debt funds has become considerably more flexible. In consequence, the German loan market will open up for certain market participants, changing the competitive lending environment in Germany.
Pursuant to the BaFin letter, the granting of loans is now seen as covered by the license for collective investment management of investment management companies. The same applies to other loan-related activities which are generally subject to permission under the German Banking Act (Kreditwesengesetz), such as loan restructuring and prolongation. Investment management companies falling under the de minimis exemptions of the AIFM-Directive and similar provisions under the German Capital Investment Code may also rely on this new administrative practice.
To take advantage of these new opportunities, loans must be eligible assets for the respective fund type and the permission of the investment management company must also cover the management of such assets. Regarding UCITS loans are no eligible assets. In its letter, BaFin made additional recommendations for German AIF as to which aspects have to be observed when those AIF are granting loans. Loans shall only be granted for the account of German closed-ended special AIF. Further, granting of loans to consumers is not permitted. German special AIF granting loans shall, inter alia, only use leverage on a very restricted basis, shall avoid maturity transformations and should observe particular guidelines regarding the risk management. It is likely that EU Funds entering into lending business in Germany must not adhere to this kind of product regulation given that the AIFM-Directive does not impose any restriction in this regard but defers such matters to the home state law maker.