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Requalification risk of infrastructure vehicles (ProjectCos) as Alternative Invesment Funds (AIFs)

Several banks active in the infrastructure finance area have recently asked their borrowers for representations in the loan agreements that infrastructure projects corporate vehicles (ProjectCos) are not AIFs.

At first glance, this appears to be a rather far-fetched concern, but a closer analysis shows that the extremely wide definition of "AIF" could, potentially, also capture ProjectCos. The fact that ProjectCos do not spread risk in a risk-diversified manner does not take them outside the scope of the AIFMD, as "risk diversification" is not a necessary criterion of an AIF. More promisingly, one could try to rely on the "joint venture exemption", which is, however, quite vague. To fall into the scope of this exemption, the ProjectCo should ideally meet two requirements:

  • Firstly, it should be established at the joint initiative of the sponsor and the equity investors, who should be consulted extensively on their preferences. Proceeding in this manner ensures that there is no "raising of capital", which is a necessary feature of every AIF.
  • Secondly, once the ProjectCo is up and running, the investors should be given "day-to-day operational control" of the entity, albeit in the form of veto and proposal rights for significant decisions affecting the ProjectCo. By becoming involved themselves, the investors avoid the ProjectCos assets being "managed (by someone else) for their" account, which is another necessary feature of an AIF. Failure to avoid the AIFMD could lead to nasty surprises, both for the equity investors and the financing banks.

Even if the ProjectCo is established outside the EEA, one cannot entirely avoid EU laws and regulations. The ProjectCo may be prevented from raising capital from investors in the EU if at any point additional capital is required. Moreover, in some countries, such as Germany, the qualification as an AIF may have adverse tax consequences, ranging from burdensome tax reporting requirements to so-called "punitive taxation" of investors.

For the financing banks, the qualification of a ProjectCo as an AIF has equally detrimental consequences: the ProjectCo, having to shoulder additional costs or being prevented from raising further capital, may not be in a position to service its debt. For all these reasons, it is recommended that parties seek representations from the borrowers and project sponsors regarding AIF qualifications even in infrastructure projects.

Legal and Regulatory Risk Note