Loan originating funds
10 key features
From 1 October 2014, the Central Bank of Ireland has permitted certain Qualifying Investor Alternative Investment Funds (QIAIFs) to originate loans (LOQIAIFs). The launch of the LOQIAIF follows a consultation process by the CBI over the past year. When issuing the new AIF Rulebook, the CBI also issued a Feedback Statement on this consultation which provides interesting insights on the rationale for the current structure of the LOQIAIF.
There are ten key features of the new LOQIAIF
- Who can a LOQIAIF issue loans to?
The intended loan recipients are predominantly non-financial enterprises in Ireland or overseas.
- Can a LOQIAIF do more than originate loans?
Yes, in addition to originating loans, the LOQIAIF is also permitted to participate in loans, to acquire loans in the secondary market, and to seek exposure to loans by way of sub-participations
LOQIAIFs are permitted to buy loans from a credit institution in certain circumstances
However they are prohibited from engaging in other types of commercial business; the sole activity of the fund must be dealing with loans.
- Can a LOQIAIF be a UCITS fund?
No, the LOQIAIF can only be established as an alternative investment fund governed by AIFMD and the AIF rulebook.
- Are any liquidity restrictions required?
LOQIAIFs must be closed-ended. They are permitted to make distributions throughout the LOQIAIF’s life-cycle but redemptions are subject to investor approval, and at dates determined prior to the funds launch.
- Who can invest in a LOQIAIF?
As a QIAIF with an authorised AIFM, the LOQIAIF can be passported to ‘professional investors’ across Europe.
- How might LOQIAIFs affect the banking sector?
It is envisaged that the introduction of the LOQIAIF will increase competition in the market place for credit lines to small and medium businesses both in Ireland and internationally. Increased competition could eventually reduce the loan interest rates on offer to companies.
- What protection is in place for investors in LOQIAIFs?
The CBI incorporated several features to ensure the protection of investors.
The investor protection features which drew the most comment during the consultation process were the liquidity and leverage requirements.
- Leverage: unlike other AIFs which can set their own leverage limits, the LOQIAIF must limit the debt to equity ratio to 1:1.
- Liquidity: Distributions and redemptions are permitted if liquid assets are available and there is no risk of jeopardising the regulatory compliance or liquidity obligations of the LOQIAIF.
- How must a LOQIAIF value its loan investments?
The LOQIAIF rules do not impose any valuation requirements in addition to the valuation rules in AIFMD. These valuation requirements already oblige the AIFM to ensure that the valuation methods are fair, appropriate and transparent and that they are disclosed to investors. The CBI notes that AIFMD already has inbuilt mitigants to address risks arising where market prices are not available
- Is the LOQIAIF the only regulated European-domiciled loan fund available?
Currently, yes. However, the European Parliament is negotiating the terms of the “European Long Term Investment Fund” (ELTIF). This will be a regulated fund which can issue loans or make other investments. Notably, the ELTIF can currently only issue loans to a limited category of entities, while LOQIAIF on the other hand has much wider scope to issue loans.
- What are the Tax Considerations of the LOQIAIF
From a direct tax perspective, obtaining treaty access for these funds will be key in minimizing any tax leakage both in terms of withholding tax suffered on income into the fund and payments out of the fund. Ireland has double taxation agreements with 71 countries, of which 68 are currently in effect. The Irish Revenue’s willingness to issue certificates of tax residence for Irish funds has led to a lot of success in the past in obtaining treaty benefits. However, in some foreign jurisdictions Irish funds (because they often don’t pay tax) can sometimes be considered as tax exempt entities and as such access needs to be considered on a case by case basis.
How can we help
As both Irish and overseas entities are permitted to borrow funds from the LOQIAIF, we anticipate that there will be strong interest internationally in the LOQIAIF as an alternative source of financing to venture capital or banking sources.
Our teams of banking and tax experts can assist you with:
- Transaction support and transaction structuring;
- Valuation of loans and collateral;
- Advising on the transfer of loans from financial institutions to LOQIAIFs;
- Advising on the tax implications of purchasing and originating loans on a global basis, or any tax consequences of dealing with any realised collateral;
- Advising on the tax structuring of a LOQIAIF.