German legislature approves AIFMD debt funds

The move to approve AIFMD-compliant loan funds puts European managers at an advantage over non-European ones.

The German Ministry of Finance has drafted legislation permitting certain private debt funds to grant loans to German borrowers. To comply with the new law, funds will need to be managed in line with the Alternative Investment Fund Managers Directive (AIFMD), a European financial directive which came into force in 2011.

The German regulation follows similar moves in Malta, Ireland and Italy, coming after Bafin, the national regulator, recommended that certain asset managers without a banking licence be allowed to grant loans, as reported.

The exemption from the German Banking Act for direct lending in Germany is limited to German and EU AIFMs and their respective funds, as they will be AIFMD compliant.

Offshore funds, such as those designated in the Cayman Islands or in the US, will need to register with Bafin before they are able to benefit from the new legislation, Hans Stamm, partner at law firm Dechert, told Private Debt Investor.

The new regulation aims to provide a level playing field for German and non-German asset managers and allows funds granting loans to German borrowers to be outside the regime for banks, Stamm said.

However, “there is a clear preference for European funds and European managers,” he added.

Under German law a banking licence is required to provide debt. In order to gain exposure to loans, many private debt funds operating in the country have been using so-called ‘fronting banks’ to make loans, Stamm explained, a process seen as legally compliant but inefficient in terms of time and cost.
Additionally, some of the private debt funds operating in Germany are still not AIFMD-compliant, with most set up in other offshore jurisdictions such as Jersey, Guernsey, the Cayman Islands or the US, PDI understands.

“There is a clear preference for European funds and European managers,” Stamm said. “I would say a substantial part are currently not AIFMD compliant. Many of them are set up in Jersey or Guernsey or real offshore – Cayman or Bermuda. There are newer funds though that are starting to consider whether they should be subject to AIFMD.”

A spokesman for Bafin told PDI that according to the draft, loan origination is allowed for closed-ended special AIFs on condition of a leverage limit of 30 percent of the fund’s capital, no loan origination to consumers and risk diversification.

There are also exemptions for shareholder loans of closed-ended special AIFs. Furthermore, a management company which intends to set up a closed-ended special loan originating AIF has to comply with appropriate risk and liquidity requirements.

“It is important to note that there has been a consultation on the first draft bill and due to the consultation responses, the rules on loan origination are subject to change in the upcoming legislation process,” the spokesman said.

The first draft of new legislation was published in July and is expected to be finalised at the end of the year as part of a wider law-making package, UCITS 5, which is a piece of European legislation that will be implemented by the year end.