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New EU regulation of loan origination by funds

On February 26, 2024, the EU Council adopted amendments to the EU Alternative Investment Fund Managers Directive (AIFMD II), with a specific focus on the impact of these changes on funds engaged in loan origination activities. Following a political compromise reached with the European Parliament on February 7, 2024, the new rules are set to be published in the EU’s Official Journal and will become effective 20 days later. Implementation into national laws across EU Member States is expected within 24 months, by early 2026.

The amendments introduced by AIFMD II will significantly affect all alternative investment funds (AIFs) involved in various types of loan origination. The directive defines “loan origination” as the granting of a loan either directly by an AIF or indirectly through an SPV or third party, with the AIF or AIFM involved in structuring the loan.

Key requirements applicable to funds providing loans include a ban on “originate-to-distribute” strategies, lending concentration restrictions, risk retention obligations, and the establishment of policies and procedures for loan origination and credit portfolio administration. Additionally, Article 23 disclosures mandate transparency about costs linked to loan administration.

For “Loan-Originating AIFs,” characterized by strategies primarily focused on loan origination, additional requirements include a preference for closed-end structures, with open-end options subject to certain conditions. Leverage caps of 175% for open-end and 300% for closed-end Loan-Originating AIFs are also established.

Grandfathering provisions apply to loans originated before the AIFMD II enters into force, offering exemptions for existing AIFs regarding closed-end preferences and leverage caps.

A significant advantage for AIFMs emerges post-implementation, as they gain an EU passport for cross-border loan origination activities across all EU Member States.

In conclusion, AIFMD II introduces comprehensive requirements for investment funds engaged in loan origination within the EU, irrespective of whether it is a primary investment strategy. It also facilitates an EU passport for AIFMs involved in loan origination, streamlining cross-border activities. Funds engaged in loan provision should proactively review their status under the new rules, assess loan portfolios for risk factors, and adjust policies and disclosures accordingly before the regulations come into effect.

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