On the 2nd April, 2014 the MFSA published a set of Investment Services Rules – “Standard License Conditions applicable to Collective Investment Schemes authorised to invest through Loans” (the “Rules”), which apply to funds investing through loans, in addition to the laws, regulations or standard licence conditions that are currently applicable to Alternative Investment Funds (“AIFs”) or Professional Investor Funds (“PIFs”).
Loan Funds
The Rules apply to funds investing through the direct origination of loans by the fund or the acquisition by the fund of a portfolio of loans or a direct interest in loans which gives rise to a direct legal relationship between the fund as lender and the borrower (“Loan Funds”). Loan Funds may be licensed as AIFs or PIFs targeting Qualifying or Extraordinary Investors, and must be structured as closed-ended funds. They may be issued solely and exclusively to unlisted companies and SMEs; financial undertakings are ineligible to receive financing from a Loan Fund. Entities which are eligible to receive loans in terms of the Rules are prohibited from transferring any loans so received to a third party.
Loan Funds may only be marketed to Professional Clients as defined in Section I to Annex II to the Markets in Financial Services Directive (“MiFID”) or to investors who, upon request, elect to be treated as Professional Clients as per Section II to Annex II to the MiFID and commit to investing a minimum of EUR 100,000.
Service Providers
The Rules require Loan Funds to appoint a fund manager (unless the fund is self-managed), a custodian, an auditor, an external valuer (where applicable), a compliance officer and a money laundering reporting officer.
The fund manager must possess the necessary skills and expertise to ensure that any lending decisions are made with due consideration as well as proven experience in the area of granting of loans. Even though prima facie the Rules aim to regulate Loan Funds, they impose a duty on the fund manager to comply with the standard licence conditions laid down in the Rules and the Investment Services Rules for PIFs / AIFs, under the supervision of the directors of the fund. The Rules require, among other things, that the fund manager establishes, implements and maintains procedures and policies to monitor large exposures and to manage credit risk (including the establishment of a credit administration function), liquidity risk and risks in general (including the creation of a risk management function).
Investment Restrictions
The Rulebook prohibits the use of leverage, the re-use of collateral and short selling. Furthermore, it imposes a number of investment restrictions, including the following:
- the fund may invest up to 30% of its assets in liquid securities;
- the fund may invest maximum 10% of its capital in a single undertaking;
- the fund may not invest more than 10% of its capital in units / shares of other loan funds, and the aggregate value of such investments may not exceed 20% of the fund’s capital;
- the fund may not acquire more that 25% of the units / shares of a single loan fund.
Cash borrowing for liquidity purposes is permitted, subject to certain restrictions, and may not exceed 30% of the fund’s capital.
Cross-investment between sub-funds within the same umbrella structure is possible, subject to certain conditions.