On April 12, the European Securities and Markets Authority (ESMA) published an opinion (Opinion) addressed to the European Parliament, European Council and European Commission (EC), on the potential for a European framework on loan origination by investment funds. The Opinion is issued in the context of the EC’s ongoing work toward its Action Plan on Building a Capital Markets Union, published in September 2015.
The Opinion sets out key issues identified by ESMA to be considered for any loan origination framework, including recommending the authorization (i.e., licensing) of loan-originating funds and their managers and the types of loan-originating alternative investment funds (AIFs) (including a recommendation that they should be closed-ended AIFs), as well as making recommendations as to the types of investors (generally, non-retail), eligible investments and eligible debtors.
As a basic principle, ESMA believes that loan-originating AIFs should not be allowed to have liabilities with a shorter maturity than the loans granted by the fund. In the case of AIFs with a finite lifecycle, ESMA believes that the maturity of originated loans should not exceed the remaining lifespan of the originating AIF.
ESMA also has included organizational requirements for AIFMs managing loan-originating AIFs, as well as leverage, liquidity, stress testing and reporting principles.
It should be noted that the Opinion––and, it is understood, any new EU legislation that forms part of a new loan origination framework––would not be applicable to AIFs that participate in loans on the secondary market, such as credit funds.
The EC is expected to consult on the European loan origination framework (and any new legislation) later this year. ESMA has encouraged the EC to incorporate the elements identified in its Opinion into the resulting framework.
A copy of ESMA’s Opinion can be found here.
A copy of ESMA’s accompanying press release can be found here.