Loan origination and loan restructuring by German AIFs – BaFin's new approach
Ever since the financial crisis of 2008/2009, lending activities of non-banks – including investment funds – has become more important.
Regulators and legislators initially regarded this with some concern, dubbing the lenders as "shadow banks" and calling for tougher regulation.
Now, the picture has changed, at least in Europe, and finally also in Germany. On 12 May 2015, BaFin published an administrative information letter explaining a change in its administrative practice in relation to the granting, as well as the restructuring and prolongation, of loans and loan receivables for the account of Alternative Investment Funds (AIFs). Certain (closed-end) AIFs may now originate loans (without having to consider licence requirements under the German Banking Act – Kreditwesengesetz - KWG), whereas other (open-end) AIFs – and these are the more important ones – are permitted to restructure and prolong loan receivables acquired for the account of these AIFs, subject to certain limitations (also without having to consider licence requirements under the KWG).
The change in the administrative practice is due to the European legal situation (eg loan originating funds are now expressly permitted in Ireland, Malta and Latvia), as well as in consideration of current discussions by the European Securities and Markets Authority (ESMA). These changes can be considered as a significant paradigm shift as the granting of loans and the restructuring and prolongation of loan receivables by AIFs are now to be seen as part of collective investment management and are therefore permissible in Germany to the extent that they are consistent with the provisions of the German Investment Code (Kapitalanlagegesetzbuch – KAGB). The former limitation on the basis of the KWG is no longer upheld – at least not for German AIFs and their AIF Management Companies (AIFMs).
In this respect, the BaFin recommends that AIFMs wishing to originate and/or restructure loans and loan receivables comply with certain minimum requirements for the granting of these loans and the acquisition and restructuring or prolongation of non-securitised loan receivables (as well as for the granting of shareholder loans for the account of an AIF) until the corresponding legal provisions come into effect.
BaFin's recommendations should be complied with when structuring AIFs that intend to grant or invest into loans for the account of the AIF, as the BaFin made it very clear that if an AIF and its AIFM respectively do not follow these recommendations, they will have to modify their business and that of the managed AIF when the amended KAGB enters into force.
- Loan and/or debt strategies are increasingly popular with institutional investors. Until March 2015, the acquisition of non-securitised loan receivables by some AIFs was permitted, but effective management has quickly come up against regulatory limits. Loan origination was generally not permitted by or for the account of an AIF.
- Pursuant to the new BaFin administrative information, not only the restructuring of loans but also the granting of loans for the account of particular AIFs now form part of collective asset management and thus fall outside the limitations set by the KWG.
- The BaFin's administrative information solves important problems for the industry and investors, such as the question of whether and when the restructuring of loans of AIFs requires permission under the KWG.
- BaFin clarifies that certain – closed-end – AIFs may now even grant loans themselves and directly (without any fronting bank) pursuant to the KAGB. This is a real innovation and an important signal for Germany as a fund location.
- Open-end AIFs are not permitted (recommendation) to originate loans but may now restructure acquired loan receivables. However, this easing was not for free: such open-end AIFs which were permitted to invest up to 100% in loan receivables in the past are now limited to 50% regarding their investment in loan receivables.
- In any event, the risk and liquidity management of AIFMs investing in or originating loans for the account of AIFs must be appropriate. At the very least, the loan originating AIFs and their AIFMs respectively must comply with credit procedures that are similar to the ones for banks. Continuing need for clarification – EU, EEA and third countries
The new administrative practice of the BaFin can be considered as a significant paradigm shift and might lead to positive impacts as it opens up new possibilities to use closed-end AIFs as a vehicle for direct lending to German borrowers without the requirement to use a fronting bank.
Open-end and closed-end AIFs now have certainty that they may engage in the restructuring of loan receivables. Taking into account that the material scope of application is per se limited to German AIFs, however, some outstanding issues need to be clarified in order to create certainty.
In particular, a question arises in relation to non-German funds granting cross-border loans to German borrowers. As stated by the BaFin, the granting as well as the restructuring and prolongation of loans for the account of AIFs are to be seen as part of collective investment management and are therefore permissible to the extent that they are consistent with the provisions of the KAGB. By taking into consideration that the provisions of the KAGB pertain to the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in Germany, EU-AIFs, too, should be permitted to grant, restructure or prolong loans for German borrowers, if they have the EU-passport for collective investment management in Germany.
However, while German law must not discriminate against EU funds, given the harsh consequences of engaging in lending business without the required licence, as an EU-AIF, one should probably seek a clarification from BaFin before lending to German borrowers.
Further, a question arises with regard to German AIFMs intending to offer cross-border lending to borrowers in other EEA countries. Clarification is needed in particular if other EEA member states do not take into account the ESMA interpretation which deems loan origination for the account of AIFs permissible.
Under German law, a licence requirement would not be triggered if a German borrower has addressed a non-EU-AIFM without previously being approached by the non-EU-AIFM (reverse solicitation). Conversely, this means that a licence requirement might be triggered if the non-EU-AIFM (not able to use the EU-passport for its collective investment management and not subject to interpretation of EU laws) targets German borrowers in order to offer cross-border lending frequently and on a commercial basis.
Where on the web
To read the full briefing paper, see: https://www.aohub.com/aoos/attachment_dw.action?key=Ec8teaJ9VaoZ174vN5ivw17eOOGbnAEFKCLORG72fHz0%2BNbpi2jDfaB8lgiEyY1JAvAvaah9lF3d%0D%0AzoxprWhI6w%3D%3D&attkey=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQJsWJiCH2WAWuU9AaVDeFgmQC8qw2efgS&fromContentView=1&fromDispatchContent=true&nav=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQTBTrTXtG0BY%3D&uid=A90oZpiwEoQ%3D&popup=HxapDW%2FMKd4%3D&freeviewlink=true&emailtofriendview=true.
1. Internet reference: http://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Auslegungsentscheidung/WA/ae_150512_kreditfonds_aif.html
2. Internet reference: http://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Auslegungsentscheidung/WA/ae_150512_kreditfonds_aif.html
3. Internet reference: http://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Meldung/2015/meldung_150513_verwaltungspraxis_kreditfonds_en.html Shareholder loans are not in the scope of this briefing paper.
4. Internet reference: http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32011L0061&from=EN.