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Loan funds – a compelling opportunity

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For a number of years, it has been practically impossible for funds to grant loans to third parties unless done on a one-off basis. Potential loan funds have, until now, not considered Malta.

The issue in this regard has always been a licensing one in that, in terms of the Financial Institutions Act, generally speaking the provision of a loan on a regular or habitual basis requires a financial institutions licence from the MFSA. This, coupled with the often strict interpretation of the MFSA as to what constitutes ‘lending’ and what constitutes ‘regular’ or ‘habitual’, has meant that funds have been unable to grant loans without risking a licensing trigger. In response to this issue the MFSA created a new model for funds wishing to carry out lending activities by allowing alternative investment funds (AIFs) and professional investor funds (PIFs) to grant loans provided a number of conditions are met.
 
A fund may now ‘invest through loans’.
 
This has been defined as:
 
i)          the direct origination of loans by the scheme; or
 
ii)         the acquisition by the scheme of a portfolio of loans or a direct interest in loans which gives rise to a direct legal relationship between the scheme as lender and the borrower.
 
A loan fund may issue loans solely and exclusively to unlisted companies and small and medium sized enterprises, subject to a number of conditions, including that financial undertakings are not eligible to receive financing from these schemes.
 
The fund must be closed-ended and may only target specified professional investors, these being:
 
a)         investors which are considered to be professional clients in accordance with MiFID; or
 
b)         investors which, on request, elect to be treated as professional clients in accordance with MiFID and commit to investing a minimum of EUR100,000.
 
Such schemes may therefore be established as AIFs or PIFs marketed to Qualifying or Extraordinary Investors in accordance with the applicable Investment Services Rules.
 
Such a fund would be subject to a number of investment restrictions, including that it may not invest more than 10 per cent of its capital in a single undertaking, it may not encumber the assets held in the portfolio of the scheme; and may not use leverage or reuse collateral. The fund manager is also obliged to implement a number of policies, including a credit risk policy in order to establish the framework for lending and guide the credit-granting activities of the fund.
 
Whilst this initiative is welcomed, one still finds that previous issues remain unresolved – the Financial Institutions Act linked the licensing obligation to a frequency factor which in the case of loan funds has not been maintained. So in essence a fund must immediately obtain a licence as a loan fund if it intends to lend funds to an entity even if on a single instance.
 
Furthermore, questions still remain unanswered as regards what constitutes a loan, the acquisition of a portfolio of loan or direct lending.
 
On the other hand, it is expected that this initiative will provide the necessary regulatory framework to entities that are actively seeking the opportunity to use the fund vehicle to carry out lending activities. We are confident that, together with the flexibility and success of the de minimis AIF/PIF structure already established in Malta, this opportunity will add additional pages to Malta’s already successful fund storybook. 

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