What is likely the final text for amendments to the Alternative Investment Fund Managers Directive (“AIFMD2”) was released earlier this month. AIFMD2 will become effective in 2026, subject to grandfathering and/or transition.
AIFMD2 confirms that EU (Host) AIFMs can engage in loan origination. AIFMD2 does not remove restrictions that certain EU Member States (“EUMS”) impose when it comes to lending into that EUMS.
AIFMD2's provisions on loan origination apply if loan origination is conducted by an alternative investment fund (“AIF”) managed by an EU AIFM. To attract EU investors, US credit fund managers often offer a Luxembourg fund (sleeve) and typically appoint a Luxembourg (Host) AIFM to accommodate EU marketing of such a fund (sleeve), which would thus trigger AIFMD2.
AIFMD2 requires the EU AIFM to ensure that the AIF it manages will not originate loans to any other AIF (or to certain other financial undertakings) if the notional value of such a loan exceeds 20% of the AIF's contributed plus uncalled capital (“Cap”). The Cap is subject to ramp-up and ramp-down rules. The Cap is expected to have a limited impact as the diversification policy of a credit fund is generally already more restrictive. However, Luxembourg feeder AIFs often on-lend their capital to a master AIF, which in turn conducts the loan origination to third parties. To comply with the Cap at feeder level, the Cap would need to be assessed on a “look-through” basis. That approach seems in line with the spirit of AIFMD2.
Originate-to-distribute strategies will be prohibited. The EU AIFM must apply a risk retention rule dictating that the AIF retains at least 5% of the notional value of each loan it has originated, subject to certain exceptions. The minimum retention period is until maturity or for 8 years, whichever comes first. Proceeds from loan origination (mainly interest and origination fees) should be fully allocated to the AIF.
An AIF will be subject to a 300% leverage cap (leverage/NAV), following the commitment approach (e.g., hedges are netted-off), if its strategy is mainly loan origination or where the nominal value of the loan originated represents at least 50% of the NAV. EUMS may impose stricter leverage limits. Sublines secured on capital commitments will not count towards exposure. Exceptions apply for AIFs if they solely originate shareholder loans, the notional value of which is not exceeding in aggregate, 150% of the AIF's capital.
For all the above rules, loan origination by vehicles controlled by the AIF or on behalf of the AIF/EU AIFM while they have a role in the structuring of the loan is considered loan origination by the AIF.
If an AIF engaged in loan origination is not managed by an EU AIFM and offered in the EU under national private placement rules (“NPPR”), the above rules do not apply, unless the EUMS imposes similar rules under their NPPRs.
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