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The loan origination regime under AIFMD II is due to come into force on 16 April 2026 (subject to national implementation).
EU AIFMs will need to ensure that each of their AIFs involved in loan origination comply with applicable rules by the effective date, subject to the availability of grandfathering. This note includes a reminder of the rules comprising the regime, a list of FAQs relating to those rules, and a summary of the practical steps for implementation.
Reminder of the rules
The loan origination regime in AIFMD II comprises the loan origination rules, which apply to AIFs originating loans, and two additional rules that apply to loan-originating AIFs (LOFs). These rules are summarised below and are subject to certain exceptions (which are not set out in detail here).
Loan origination rules
- 20% concentration limit for single borrowers that are a financial undertaking, UCITS or AIF;
- 5% risk retention requirement for loans originated by the AIF and subsequently transferred to third parties;
- borrower restriction prohibiting the origination of loans to the AIFM or its staff or delegates, the AIF depositary or its delegates, and entities within the AIFM's group (except where the borrower is a financial undertaking that exclusively finances borrowers that are not any of the foregoing). Member states may also prohibit AIFs from originating consumer-related loans;
- attributing proceeds of originated loans to the AIF in full (minus any allowable fees for administration);
- no originate to distribute as the sole strategy of AIFs originating loans;
- policies and procedures in place for the granting of loans, assessing credit risk and administering and monitoring their credit portfolio.
LOF rules
- leverage limit of175% for open-ended AIFs and 300% for closed-ended AIFs (based on NAV and calculated using the commitment method);
- LOFs must be closed-ended unless the liquidity risk management system is compatible with the investment strategy and redemption policy. Open-ended LOFs must select two liquidity management tools (LMTs) from a prescribed list and comply with associated regulatory technical standards and guidelines.
Grandfathering
- AIFs established before 15 April 2024 and that raised capital after that date are deemed to comply with the LOF rules and concentration limit until 16 April 2029. If in breach of the concentration limit or leverage limit as of 15 April 2024, no increase to those limits during the period to 16 April 2029 is permitted.
- AIFs established before 15 April 2024 and that did not raise capital after that date do not need to comply with the LOF rules and concentration limit. Loans originated before that date do not need to comply with the remaining loan origination rules.
FAQs
The rules comprising the loan origination regime have raised a series of frequently asked questions, examples of which are below. In lieu of regulatory guidance on these points, Macfarlanes has formed a view on each of these points in discussion with local counsel and is happy to share its views with clients.
Definitions of a LOF and loan origination
- When and how often should the "at least 50% of NAV" test in limb (ii) of the LOF definition be calculated? On what data should the calculation be determined and how do fluctuations in asset values impact this test? Is there any leeway on this test (e.g. during ramp-up / ramp-down)?
- How should the loan origination regime (including the LOF definition) apply to a feeder fund?
- If an AIF acquires a loan on the secondary market (i.e. the loan is not originated by the AIF), but subsequently agrees to refinance/restructure that loan as creditor, would the loan be treated as "converted" from a non-originated loan to an originated loan?
Leverage limit
- Do underlying vehicles of an AIF that are leveraged (e.g. a leveraged SPV or a leveraged master fund) count towards the AIF's leverage limit?
- How does the transitional provision regarding the leverage limit which is afforded to LOFs established before 15 April 2024 and which continued to raise capital after that date (which applies until 16 April 2029) apply in practice?
Attribution of loan proceeds
- Does this rule mean that AIFs cannot structure co-investments/syndications as sub-participations?
Originate to distribute
- Does the prohibition on having an "originate to distribute" strategy apply to an AIF that originates a loan and then syndicates a portion to other lenders/creditors?
Risk retention/shareholder loans
- Would a loan continue to meet the definition of a "shareholder loan" and comply with the 5% risk retention rule if the loan was repaid or refinanced and the equity subsequently sold?
- Would a loan to an entity that is the borrower of a loan originated before 15 April 2024 be subject to the risk retention rule?
Scoping of AIFs
- How should it be determined whether an AIF is open-ended? For example, should an AIF with terms such as a tender offer or run-off redemption mechanism be treated as open-ended?
- Are EU AIFs that are in the process of being liquidated as at 16 April 2026 in scope of the rules comprising the loan origination regime?
If you would like to understand Macfarlanes' view on these questions, please get in touch via the contact details below.
Impact on non-EU AIFs
Non-EU AIFs with a non-EU AIFM are not intended to be subject to the loan origination regime under the revisions in AIFMD II. However, non-EU AIFs may nevertheless need to comply with elements of the regime owing to potential "gold plating" by certain member states. As at the date of writing, AIFMD II has not yet been fully implemented across the EU. Post-AIFMD II implementation, non-EU AIFs will need to consider whether their loan origination activities are subject to restriction in certain member states, either pursuant to local implementation of AIFMD II, changes to the National Private Placement Regimes, or owing to local "banking monopoly" rules.
Practical steps
AIFMs with AIFs in scope of AIFMD II should ensure their implementation plans comprise the following steps, taking into account any relevant member state 'gold plating' or diverging interpretation of the rules:
- Scoping – identify EU AIFs in scope of AIFMD II, AIFs originating loans, LOFs, open vs closed-ended AIFs, availability of grandfathering and availability of exemptions.
- Benchmarking/gap analysis – benchmark AIFs and existing loan arrangements against the loan origination rules and LOF rules (as applicable) to determine potential changes required to fund documents or existing loan documents to ensure compliance.
- Implementation of required changes to fund documents and existing loan arrangements – prepare and agree updates to documents and comply with relevant approval / notification requirements of applicable regulator(s), investors and service providers.
- Go-forward processes– update template fund and loan documents and conduct reviews/updates to internal compliance measures and product design processes to ensure ongoing compliance.
Further information
Further information regarding the loan origination regime and other rules introduced by AIFMD II can be found in the following Macfarlanes articles:
- What is included in the AIFMD II provisional agreement? | macfarlanes (7 August 2023)
- AIFMD II - Final compromise text published | macfarlanes (20 November 2023)
- AIFMD II final text published in the EU's Official Journal | macfarlanes (26 March 2024)
The requirements comprising AIFMD II including associated regulatory technical standards and guidelines can be found in the links below:
- AIFMD II level 1 text
- RTS on LMTs for open-ended AIFs
- Final report on draft RTS for open-ended LOFs (not yet adopted)
- Guidelines on LMTs for open-ended AIFs
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
