MFSA publishes revised framework of loan fund rules – Fund management / REITs

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On 10 November 2020, the Malta Financial Services Authority (the “MFSA”) has published a revised version of the standard license conditions applicable to undertakings for collective investment authorized to invest by way of loans (the “Loan fund rules”).

As part of the restructuring of the framework, the MFSA has carried out an assessment of the rules of the loan fund in view of new market developments, the current economic scenario and the direction taken at EU level with regard to the granting of loans by the funds. The MFSA, among otherstook note of the emphasis placed by the European Commission on the area of ​​non-bank financing, within the broader framework of the capital markets union, which aims in particular to facilitate the task of small and medium-sized enterprises (SME) to be able to access other sources of finance and therefore reduce their overreliance on bank finance, in order to ensure that SMEs have access to adequate finance and can further diversify their sources of finance.

In addition to the above, the aim of the MFSA’s review of loan funds rules was also to achieve a more accessible framework for FIPs (established as loan funds) managed by de minimisAIFM. This is because the previous rules on loan funds did not distinguish between AIFs managed by full managers and PIFs managed by de minimis For AIFMs, the same onerous requirements therefore applied to both types of fund structures, making loan funds less accessible to smaller asset managers.

Here are some of the key changes introduced by the revised loan fund rules:

-The fund structure has been maintained as closed (PIF or AIF), but the requirement to have all compartments necessarily classified as loan funds within the same apex structure has been removed;

-For self-managed loan funds of PIFs, the initial paid-up share capital of EUR 300,000 has been removed, and the initial paid-up share capital of PIFs investing through loans must now comply with the PIF Regulation (i.e. say EUR 125,000);

– The credit fund investment strategy has been expanded to include factoring and/or fixed price activities;

-While the target investors have remained the same (i.e. professional investors), the target loan recipients (which were previously limited to unlisted companies and SMEs) have been broadly expanded, based on the ESMA opinion on loan origination funds, excluding only individuals, financial companies, undertakings for collective investment, the AIFM and related parties (i.e. the depositary) and credit fund service providers;

-With respect to service providers, the new loan fund rules replicate the requirements of the AIF Regulation and the PIF Regulation, with the exception of the PIF loan funds to have an assessment agreement in place in accordance with the rules of the loan funds;

-In terms of borrowing and leverage limits, borrowing restrictions have been removed and the use of leverage (including borrowing) is permitted up to 200% of the net plan assets. In addition, short selling and reuse of collateral is not permitted;

-The investment restrictions of the old rules on loan funds have been removed, therefore no fixed diversification requirements or exposure limits apply;

-Risk management rules have been simplified to avoid duplication of requirements (already applicable to AIFMs) and also to avoid applying the same rules applicable to full AIFMs for
de minimis AIFM;

-With regard to liquidity management, the revised loan fund rules do not include the liquidity maturity ladder requirement (i.e. asset/liability management) , which appeared in the previous rules on loan funds. However, the AIF system or manager ensures that it has documented liquidity management policies and procedures in place and that the investment strategy, liquidity profile and redemption policy are aligned accordingly .

The revised loan fund rules began to apply from November 10, 2020 to new applicants. The previous loan fund rules remain applicable to approved loan funds until the above-mentioned date. Existing Approved Loan Funds that choose to change any of their current applicable requirements in light of the revised Loan Fund Rules should provide proper notice to investors and seek regulatory approval, if required.

The revised loan fund rules can be obtained by clicking on here.

Originally published by Camilleri Preziosi, December 2020

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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