The Commission de Surveillance du Secteur Financier (the "CSSF") has updated the Frequently Asked Questions (the "FAQ") concerning the Luxembourg law of 12 July 2013 on alternative investment fund managers (the "2013Law") as well as the Commission's Delegated Regulation (EU) No 231/2013 of 19 December 2012 (the "Delegated Regulation") supplementing Directive 2011/61/EU of 8 June 2011 of the European Parliament and the Council on alternative investment fund managers (the "AIFMD").1
In the updated FAQ dated 9 June 2016, the CSSF provides some additional guidelines on loan origination by Luxembourg based alternative investment funds ("AIFs"), which are welcome after the European Securities and Markets Authority's opinion on Key principles for a European framework on loan origination by funds of April 2016.2
The CSSF has confirmed that neither the AIFMD and the 2013 Law, nor any of the Luxembourg laws governing Part II funds3, SICARs4, or SIFs5 ("Product Laws") restrict AIFs from granting or acquiring loans. The updated FAQ also contains definitions of loan origination and loan participation/acquisition ("Loan Activities").
The CSSF defines loan origination as "the process, initiated by its AIFM or, where applicable, by the AIF itself, of actively creating/granting/extending a loan as part of its investment policy", while noting that this "may comprise all relevant steps in the origination process, that is, among others, receiving and processing loan applications, performing the credit assessment and borrower selection, setting the characteristics of a specific loan (e.g., pricing (interest rates and fees), type of documentation, collateral requirements), monitoring, servicing and provisioning". Based on such definition, it is understood that "the AIF becomes the original lender and the lending process is part of its investment policy".
As far as loan participation/acquisition is concerned, it is defined as "the process, initiated by its AIFM or, where applicable, by the AIF itself, of purchasing/acquiring all or parts of an existing loan or package of loans (whether fully drawn or not) on the secondary market from a third party after its origination". In addition, "any other way for the AIF to acquire loans as an investment apart from loan origination (such as e.g. participation (or sub-participation) in syndicated loans, consortiums, club deals)" is also covered.
While the CSSF notes that the general requirements under the 2013 Law, as well as any specific requirements under the applicable Product Law will need to be complied with, it adds AIFMs engaging in Loan Activities should:
- ensure to address all aspects and risks of this activity; and
- particularly avail of proper organisational and governance-structures (processes and procedures), necessary expertise/experience in origination activity combined with appropriate technical and human resources, with a focus on credit and liquidity risk management (within an overall adequate risk management process), concentration and risk limitation, clear policies regarding assets and investors (e.g. loan and investor categories, avoidance of conflicts of interest), proper disclosure and transparency, amongst other.
It is important to note that pursuant to the CSSF, it is generally the responsibility of the AIFM or, where applicable, of the AIF itself, to ensure the implementation of a robust and appropriate approach for any loan origination of participation/acquisition activity.
Finally, the CSSF has confirmed that it will assess, on a case-by-case basis, the approaches adopted by the AIFMs or, where applicable, by the AIFs in the context of its approval and on-going supervisory process, to the extent applicable.