*Net risk = sum of exposures taking netting and hedging strategies into account

Subscription lines, ie borrowing arrangements fully covered by contractual capital commitments from investors in the loan-originating AIF, do not constitute exposure for the purposes of calculating that ratio. It is interesting to note that, contrary to the provisions on the calculation of leverage under the AIFMD-CDR, it is not specified that such subscription lines must be temporary in nature to be excluded from the calculation of leverage.

In the case of breach of the leverage limit for reasons beyond the control of the AIFM, the AIFM must “within an appropriate period of time, take such measures as are necessary to rectify the position” taking into account the AIFs investors interest.

Transitional provisions

1. The leverage limits must be complied with by AIFMs as from the implementation date in their home Member State; 
2. AIFs established before 15 April 2024 are grandfathered:

• indefinitely if they do not raise capital after 15 April 2024; or
• until 16 April 2029, if they raise capital after 15 April 2024, but during the grandfathering period they may not increase leverage beyond the higher of:

• 175% (for open-ended loan-originating AIFs) or 300% (for closed-ended loan-originating AIFs); and
• where the leverage is higher than the applicable 175% or 300% limit, respectively, the level of leverage which they applied on 15 April 2024.

3 New requirements applicable to any AIFs that originate loans (including loan-originating AIFs)

The following requirements apply to all AIFs that originate loans (including, for the avoidance of doubt, loan-originating AIFs).

3.1 20% concentration limit for certain categories of borrowers

The notional value of the loans originated to any single borrower by an AIF that originates loans cannot exceed 20% of the capital of the AIF where the borrower is one of the following:

• a “financial undertaking”,⁴ which includes any of the following entities:

• a credit institution, a financial institution or an ancillary banking services undertaking⁵;
• an insurance undertaking, a reinsurance undertaking or an insurance holding company⁶;
• a MiFID investment firm or a MiFID financial institution⁷; or
• a mixed financial holding company⁸ (ie a parent undertaking, other than a regulated entity, which together with its subsidiaries, at least one of which is a regulated entity which has its head office in the EU, and other entities, constitutes a financial conglomerate); or

• an AIF; or
• a UCITS.

The 20% concentration limit:

• is without prejudice to more restrictive product diversification requirements under the ELTIF, EuVECA or EuSEF Regulations;
• is calculated by reference to the capital of the AIF defined as “the aggregate capital contributions and the uncalled capital commitments, calculated on the basis of amounts investible after deduction of all fees, charges and expenses that are directly or indirectly borne by investors”;
• must be complied with by the date determined in the AIF’s governing documents or prospectus which must not occur later than 24 months from the date of the first subscription for shares or units in the AIF,  unless the competent authority of the AIFM allows an extension for a maximum of one year upon submission of a duly justified investment plan;
• ceases to apply when the AIFM starts to sell the AIF’s assets in order to redeem units or shares as part of the liquidation of the AIF; and
• is temporarily suspended (for the period necessary and up to 12 months considering the AIF’s investors interests) where the AIF’s capital is increased or reduced.

Transitional provisions

1. The concentration limits must be complied with by AIFMs as from the implementation date in the AIFM’s home Member State.
2. AIFs established before 15 April 2024, are grandfathered:

• indefinitely, if they do not raise capital after 15 April 2024; 
• until 16 April 2029, if they raise capital after 15 April 2024. But during the grandfathering period, they must not increase exposure vis-à-vis any single borrower beyond the higher of:

• 20%; and
• if higher than 20%, the exposure to such borrower on 15 April 2024.

3.2 Risk retention requirement

When an AIF transfers a loan originated by it to third parties, it must retain 5% of the notional value of such loan: 

• until maturity for loans whose maturity is up to eight years and for loans granted to consumers regardless of their maturity; and 

• for a period of at least eight years for other loans.

The risk retention requirement ceases to apply:

• when the AIFM starts to sell the AIF’s assets in order to redeem units or shares as part of the liquidation of the AIF; 
• when a disposal is necessary to comply with EU sanctions or with product requirements (eg when retaining the originated loan would breach investment or diversification requirements);
• when a disposal is necessary to enable the AIFM to implement the AIF’s investment strategy in the best interest of investors (eg when there is a change in the asset or sector allocation); or 
• when a disposal is necessary due to a deterioration in the risks associated with the loan, detected by the AIFM as part of its due diligence and risk management process, and the purchaser is informed of that deterioration when buying the loan (eg when the borrower is in default and the loan no longer complies with the AIF’s strategy). 

The AIFM may, upon request by its competent authority, have to demonstrate that it meets the conditions mentioned for the application of the relevant derogation from the risk retention requirements. 

In the absence of regulatory guidance, it is unclear how the AIFMD II risk retention requirements will interact with the risk retention requirements under the Securitisation Regulation.

Transitional provisions

The risk retention requirement:

• does not apply to loans originated by AIFs before 15 April 2024; and
• has to be complied with by AIFMs as from the implementation date in the Member State of the relevant AIFM in respect of all loans originated after 15 April 2024.

As a result, existing AIFs may have in their portfolios certain loans to which the risk retention requirement will apply and other loans to which this requirement does not apply depending on the date of their origination. 

3.3 Allocation of proceeds and disclosure obligations

The proceeds of loans minus any allowable fees for the loan administration must be attributed in full to the AIF that originated loans. All costs and expenses linked to the administration of loans must be clearly disclosed in accordance with Article 23 of the AIFMD. Furthermore, article 23(4) of the AIFMD has been amended to include that AIFMs must disclose to their investors periodically the composition of the originated loan portfolio. 

Transitional provisions:

The requirements on allocation of proceeds and disclosure: 

• do not apply to loans originated by AIFs before 15 April 2024; and
• have to be complied with by AIFMs as from the implementation date in their home Member State in respect of all loans originated after 15 April 2024.

3.4 Prohibited activities

Prohibition to grant loans to certain related entities:

AIFs are prohibited from granting loans to the following entities:

• the AIFM or the staff of that AIFM;
• their depositary and the depositary’s delegates that act in respect of the AIF;
• the AIFM’s delegates and their staff;
• an entity of the AIFM’s group,⁹ except if it is a financial undertaking that only finances borrowers other than those mentioned above in the first three categories.

Consumer lending:

Based on “overriding reasons of public interest”, Member States may decide to prohibit, in their territory, AIFs from: 

• lending to consumers; and 
• servicing consumer loans. 

However, Member States cannot prohibit, in their territory, the marketing of AIFs that grant or service consumers loans in other Member States.

Prohibition of the “originate-to-distribute investment strategy”:

AIFs cannot pursue an originate-to-distribute strategy, whether such strategy is the exclusive strategy or only represents a part of the investment strategy of the AIF.

Transitional provisions

The prohibited activities: 

• do not impact loans originated by AIFs before 15 April 2024 except for the prohibition to originate loans to consumers (if applicable in the Member State of the borrower); and
• will apply as from the implementation date in the home Member State of the relevant AIFM to all loans originated after 15 April 2024.

3.5 Policies, procedures and processes for the granting of loans and credit risk management

AIFMs managing AIFs engaging in loan origination, including when those AIFs gain exposure to loans through third parties, must (i) implement effective policies, procedures and processes for the granting of loans and for assessing the credit risk and administering and monitoring their credit portfolio, (ii) keep those policies, procedures and processes up to date and effective; and (iii) review them regularly and at least once a year.

These requirements do not apply to the origination of shareholder loans, where the notional value of such loans does not exceed in aggregate 150% of the capital of the AIF.

Transitional provisions

The requirements to implement policies, procedures and processes for the granting of loans and credit risk management: 

• do not apply to loans originated by AIFs before 15 April 2024; and
• will apply as from the implementation date in the home Member State of the relevant AIFM to all loans originated after 15 April 2024.

Footnotes

<sup>1. This definition was absent from the Commission’s initial proposal and reflects a compromise between the co-legislators, who wanted to include only AIFs with a genuine loan originating strategy as the main investment strategy (qualitative criteria) but also to introduce a quantitative criterion to avoid circumvention of the rules.
2. Unless they are grandfathered
3. Article 25(3) allows the competent authorities of AIFMs to impose stricter limits after notification of ESMA, ESRB and the AIF's competent authority “if the use of leverage contributes to the buildup of systemic risk in the financial system or risks of disorderly markets”.
4. As defined in article 13, point (25), of Solvency II (Directive 2009/138/EC of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance).
5. Within the meaning of article 4(1), (5) and (21) of CRD (Directive 2006/48/EC of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions).
6. Within the meaning of article 212(1)(f) of Solvency II, ie a parent undertaking which is not a mixed financial holding company within the meaning of Directive 2002/87/EC and the main business of which is to acquire and hold participations in subsidiary undertakings, where those subsidiary undertakings are exclusively or mainly insurance or reinsurance undertakings, or third-country insurance or reinsurance undertakings, at least one of such subsidiary undertakings being an insurance or reinsurance undertaking.
7. Within the meaning of article 4(1)(1) of MiFID (Directive 2004/39/EC of 21 April 2004 on markets in financial instruments).
8. Within the meaning of article 2(15) of Directive 2002/87/EC of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate.
9. As defined in article 2(11) of the Accounting Directive (Directive 2013/34/EU of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings).</sup>