The Central Bank of Ireland ("the Central Bank") has published on 28 July 2014 a formal consultation on loan origination (the “Consultation”) which will permit Irish funds to originate loans directly.
Ireland is already a leading location for the establishment of loan funds, and this significant development will further strengthen its position as the European domicile of choice for regulated loan fund products.
Loan originating funds are those funds which undertake to source loan assets for their investment portfolio by directly originating loans. The framework set out in the Consultation envisages the establishment and authorisation of Irish-regulated qualifying investor alternative investment funds (“QIAIFs”), with the sole strategy of loan origination.
The proposal follows upon the work done by the Central Bank in its July 2013 Discussion Paper on loan origination by investment funds, which considered ways to facilitate effective flows of capital across the economy at a time of ongoing deleveraging by European banks. The intention was to effectively link the demand for funding from small to medium enterprises with the expertise within the asset management industry in the provision of lending structures and the appetite amongst investors for alternative asset classes which enhance yield and diversify risk. The result is a regulated fund structure, which will be authorised under the AIFMD framework and address any particular risks which the Central Bank has identified in relation to loan origination activities.
Loan originating QIAIFs will be able to avail of the AIFMD marketing passport, enabling distribution throughout the European Union to professional investors. QIAIFs also benefit from Irish regulatory process requirements which facilitate regulatory authorisation within a 24 hour period of document submission. Under a new legislative bill published by the Irish government this week, it will be possible to structure a loan originating QIAIF as an ICAV, a new Irish corporate vehicle, specifically designed for investment funds and with the ability to “check the box” for US tax purposes.
It is proposed that loan originating QIAIFs will be subject to certain additional Central Bank requirements to ensure that risks associated with loan origination funds are monitored and mitigated, whilst at the same time meeting the credit needs of the real economy.
These supplemental rules relate to requirements on credit granting, monitoring and management; diversification and eligible investments; liquidity and distributions; stress testing; investor due diligence; leverage; and disclosure. Some of the specific additional requirements on which the Central Bank is consulting with stakeholders are as follows:
- Loan originating QIAIFs are to be closed-ended and established for a finite period. Following the maturity of certain assets however, there may be a distribution of returns from realised assets, subject to certain conditions.
- Leverage limit: any indebtedness by the QIAIF must have total asset coverage of at least 200% (so for example, it is proposed that a QIAIF with assets of 100 may borrow 100).
- Diversification: the portfolio of loans must be diversified and exposure to any one issuer or group is limited to 25% of net assets, within a specified time-frame. However, the proposal as currently expressed in the Consultation is that where the target risk diversification is beyond the control of the QIAIF, it must seek approval from unit-holders to continue with the diversification which has been achieved, or terminate if this is not approved.
- Investors are to be kept well-informed on certain particulars relating to each loan.
It is not intended that loans will be originated by QIAIFs to natural persons; the alternative investment fund manager; depositary; delegates; other collective investment funds; financial institutions; or to persons intending to invest in equities or other traded investments or commodities.
The deadline for responses to the Central Bank Consultation is 25 August 2014.
Matheson has advised on a significant number of bank loan funds already operating in the Irish market, and we support the introduction of a regulatory framework by the Central Bank enabling Irish funds to originate loans directly.
We would be delighted to speak with you directly with a view to making submissions to the Central Bank on the detailed content of its proposals, and associated queries, as set out within the Consultation, or with respect to any forward-planning discussion you may wish to have regarding the establishment of Irish loan funds.
The Central Bank has decided not to impose a number of additional restrictions which it had initially considered at the time of the July 2013 Discussion Paper. This approach reflects feedback from industry at that time that the AIFMD regulatory regime fully addresses those risks which may apply to a loan originating (or any other type) of fund. However, we would particularly welcome any comments which you may have on those remaining provisions in the Consultation which might impact on the structuring of a loan originating QIAIF.
It is understood that the proposed Central Bank framework for loan originating funds may be in place by year end.
The Consultation may be accessed here: Central Bank Consultation Paper on Loan Originating Qualifying Investor AIF, 28 July 2014.