Credit funds

The European Commission's proposals provide some general principles for alternative investment fund managers (the "AIFMs") operating in the credit markets.

Specific to the COVID-19 pandemic, the European Commission notes that loan funds can also serve as a backstop or shock absorber during liquidity shortages by continuing to provide loan financing when more traditional lenders have withdrawn from the market.

The European Commission's goal is to strike a balance between maintaining financial stability and facilitating the development of the market for loan funds in the European Union.

The following proposed changes represent the minimum safeguards that the European Commission believes are necessary for loan funds:

• New withholding rules:
  In order to avoid the immediate sale of loans on the secondary market, alternative investment funds (the "AIFs") must permanently retain an economic interest equal to 5 % of the nominal value of the loans they originate and sell.
• New proposals to address conflicts of interest:
  An AIF may not extend credit to its AIFM or its employees, depositary or agent.
• New policies, procedures and processes:
  AIFMs managing loan funds must implement effective policies, procedures and processes for granting such loans, including credit risk assessment and managing or monitoring loan portfolios, which should also be reviewed annually. This also applies to the acquisition of loans on the secondary market.
• Credit AIFs must have a closed-end structure:
  An AIF that invests more than 60 % of its net asset value in lending must have a closed-end structure.
• New concentration limits of 20 %:
  AIFMs must ensure that any loan made by the AIF they manage to an individual borrower remains below 20 % of the AIF's capital.
• New reporting requirements:
  AIFs will be required to report to investors on their originated loan portfolios as part of the disclosure requirements under Article 23 "originated loan portfolios”.
• Annex I of the AIFMD:
  In order to recognize lending as a legitimate activity of AIFMs, Annex I of the AIFMD has been amended, thus AIFs will be able to lend across borders in the European Union. As lending is an activity of the AIF and not of the AIFM, the current proposal could lead to some ambiguity. Annex I of the AIFMD has also been amended to legitimize the servicing of securitization special purpose entities (the "SSPEs") by AIFMs.