On 10 November 2020 the Malta Financial Services Authority (the “MFSA”) published a revised version of the Standard Licence Conditions applicable to Collective Investment Schemes authorised to invest through loans (the “Loan Fund Rules”).
As part of the framework's restructuring, the MFSA carried out an assessment of the Loan Fund Rules in view of new market developments, the current economic scenario and the direction being taken at EU level with regards to loan origination by funds. The MFSA, inter alia, took note of the focus being placed on the area of non-bank financing by the European Commission, within the wider context of the Capital Markets Union, which, in particular, is aiming to make it easier for small and medium sized enterprises (SMEs) to be able to tap into alternative sources of funding and consequently, reduce their over-reliance on bank financing, in order to ensure that SMEs have access to adequate financing and can further diversify their funding sources.
In addition to the above, the aim for revisiting the Loan Fund Rules by the MFSA was also to achieve a more accessible framework for PIFs (established as loan funds) managed by de minimis AIFMs. This is in view that the previous Loan Fund Rules did not differentiate between AIFs managed by full AIFMs and PIFs managed by de minimis AIFMs, thus the same onerous requirements were applying to both type of fund structures, making loan funds less accessible for smaller sized asset managers.
Some of the main changes introduced by the revised Loan Fund Rules include the following:
-The fund structure has been kept as closed ended (PIFs or AIFs), however the requirement of having all sub-funds necessarily classifying as loan funds within the same umbrella structure has been removed;
-For PIFs self-managed loan funds the initial paid up share capital of EUR 300,000 has been removed, and the initial paid up share capital of PIFs investing through loans shall now be in line with the PIF Rulebook (i.e. EUR 125,000);
-The investment strategy of loan funds has been expanded to include the activities of factoring and/or forfaiting;
-Whilst the target investors have been kept the same (i.e. professional investors), the target loan recipients (which previously were limited to unlisted companies and SMEs) have been largely expanded, based on the ESMA opinion of loan origination funds, excluding only individuals, financial undertakings, collective investment schemes, the AIFM and related parties (i.e. the depositary) and the loan fund's service providers;
-In terms of service providers, the new Loan Fund Rules replicate the requirements of the AIF Rulebook and PIF Rulebook, with the exception for PIF loan funds to have valuation arrangement in place in line with the Loan Fund Rules;
-In terms of borrowing and leverage limits, the borrowing restrictions have been removed and the use of leverage (including borrowing) is allowed up to 200% of the net asset of the scheme. Additionally, short selling and reuse of collateral are not permitted;
-The investment restrictions of the old Loan Fund Rules have been removed, therefore no fixed diversification requirements or limits to exposures apply;
-The risk management rules have been streamlined to avoid duplication of requirements (already applicable to AIFMs) and also to avoid applying the same rules applicable for full AIFMs to de minimis AIFMs;
-With regards to liquidity management, the revised Loan Fund Rules do not include the liquidity maturity ladder (i.e. asset/liability management) requirement, that was included in the previous Loan Fund Rules. However, the scheme or the AIFM shall ensure to have in place documented liquidity management policies and procedures and that the investment strategy, liquidity profile and redemption policy, are aligned accordingly.
The revised Loan Fund Rules started to apply from the 10 November 2020 to new applicants. The previous Loan Funds Rules shall remain applicable to loan funds licensed up to the aforementioned date. Existing licensed loan funds opting to amend any of their current applicable requirements in light of the revised Loan Fund Rules, are expected to duly notify investors and to seek regulatory approval, as needed.
The revised Loan Fund Rules can be obtained by clicking here.
Originally Published by Camilleri Preziosi, December 2020
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