Proposal
The Central Bank of Ireland (Central Bank) has
issued a consultation paper, CP162, seeking market feedback on a number of
proposed enhancements to their AIF Rulebook including, in a fund
finance context, the proposed removal of the historical regulatory
prohibition which prevents Alternative Investment Funds
(AIFs) from acting as a guarantor on behalf of
third parties.
The term 'guarantor' is not defined but, in practical
terms, historically this was generally understood to mean that
Irish authorised AIFs can guarantee, secure and/or be responsible
for the obligations of themselves and their wholly owned
subsidiaries but they cannot guarantee, give security for and/or be
responsible for any other party.
In its fiftieth edition of its AIFMD Q&A, published March 2025
(available here) the Central Bank helpfully
relaxed the scope of this restriction as it applies to Qualifying
Investor Alternative Investment Funds (QIAIFs),
subject to satisfaction of certain conditions.1
Following further constructive engagement with industry, which
Walkers has been centrally involved in, the Central Bank is now
proposing a complete removal of this restriction for QIAIFs. This
would include all ICAVs and Investment Limited Partnerships which
are authorised as QIAIFs. The restriction does not apply to
European Long-Term Investment Funds (ELTIFs) and
it is very welcome to now see the Central Bank advocating for
alignment between the two regimes.
Timeline
The consultation period will run for eight-weeks and it is anticipated that the removal of the prohibition will be effective before the year-end.
Commentary
While the existing prohibition was unhelpful for master / feeder
structures, it was possible to deal with the restriction by
implementing a cascading pledge.
The proposed removal of the restriction is a welcome development
in a fund finance context for transactions involving Irish
entities. This change will simplify deals and allow QIAIFs to
provide direct guarantees and security for certain other obligors
instead of requiring a more cumbersome and costly cascading pledge
arrangement. While there will no longer be any Irish regulatory
driver for a cascading pledge, it will still be possible to
implement a cascade for other purposes e.g. ERISA or other
commercial reasons.
The proposed removal of the prohibition brings the QIAIF regime
broadly in line with other key funds jurisdictions and with the
current position for Irish AIFs established as ELTIFs which also
does not explicitly prohibit the granting of third-party
guarantees.
This development can be expected to ultimately benefit investors
and market participants by reducing deal complexity and costs of
permitted financings while also strengthening Ireland's
position as a recognised centre of excellence for the private funds
industry.
Footnote
1. Please see our article "Fund Finance: Central Bank of Ireland relaxes regulatory prohibition on provision of third-party guarantees by QIAIFs", available here for a more focussed discussion on the relaxation of this prohibition.
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