Agefi Luxembourg - novembre 2024

AGEFI Luxembourg 36 Novembre 2024 Fonds d’investissement By Anne-Marie NICOLAS, Partner, Adrien PIERRE, Partner &Marco HUSKIC, Senior Associate, Loyens&Loeff Luxembourg T he role of debt funds in the global debtmarket has been steadily increasing since the financial crisis in 2008. In the GrandDuchy of Luxembourg total assets undermanagement of debt funds reachedEUR510 billionby December 2023, with a growth of 21.5%in just sixmonths. (1) After having initially emerged as debt- participants purchasing the debt on the secondarymarket, the debt funds’ role as debt-originators has noticeably increased inrecentyears:currently,thesplitbetween debt-originating and debt-participating fundsisapproximately50-50withasmall portion of funds doing both. The activity has also shifted fromprimarily small and medium enterprises to a variety of areas as fundmanagers are searching for yields inmorediverseinvestmentopportunities. Luxembourg has become a very popular jurisdiction for the debt funds’ SPVs (2) , in particular in respect of those SPVs meant to originate or hold loan participations. Many large debt funds are based in Lux- embourg either via their Luxembourg- domiciled (either regulated or unregu- lated) funds or via their Luxembourg- basedSPVs actingasdirect lenders inafi- nancing transaction. The lending activity may take the form of loan origination by thefundsorSPVsorofacquisitionofloans on the secondarymarket. While it is more common nowadays that creditfundsandotherlendingactorswho are not already regulated inLuxembourg are aware of the fact that using Luxem- bourgSPVsmaybringthemintotheLux- embourg regulated sphere, there are still actors who may not have quite grasped the extent of the scope of such lending li- censerequirement.Thisarticleismeantto clarify a few principles that apply when using a Luxembourg lending or loan holding SPV as well as what the current market practice is in this respect. 1. Lending activities requiring a license ContrarytomostotherEuropeanjurisdic- tions, lending is, in principle, a regulated activity in Luxembourg pursuant toArti- cle 28-4 of the Luxembourg lawof 5April 1993 on the financial sector, as amended (the LFS ).ALuxembourgentitywhichin- tendstoprofessionallyengageinthebusi- ness of granting loans to the public for its ownaccountrequiresalicensegrantedby the CommissiondeSurveillanceduSecteurFi- nancier ( CSSF ). i. The concept of “lending operations” The activities potentially requiring a Lux- embourg lending license include debt- origination and may cover debt-partici- pationon the secondarymarket. The rele- vant CSSF FAQ specifically refers to the acquisition of drawn or undrawn credit lines and to the transfer of loans, where suchtransferswerecontractedsimultane- ouslywithorimmediatelyaftertheywere grantedbybanks. (3) “Lendingoperations” within the meaning of the LFS include loans, but also other financial activities suchasfinancialleasingandfactoringop- erations (4) as well as other operations that are not specifically mentioned in the ap- plicable legal framework. (5) ii. Are debt investments “lending op- erations” subject to a license in Lux- embourg? Debt investmentsmay include loanorigi- nation or loan participation or acquisition (e.g., the acquisitionof leveraged loans) as welltheacquisitionofbonds,asset-backed notes,subordinatednotes,orothersimilar instruments. Whereas lending activities throughthegrantingofloansareclearlyin scope of the LFS, the situation is less clear with respect to the acquisitionof bonds or similar debt instruments. Historically, the CSSF considered that the acquisition of bonds, notes, or other loan obligations by an entity, which were not originatedby the entity itself, didnot con- stitute a lending activity subject toArticle 28-4 of the LFS. However, where loans weregrantedororiginatedbyathirdparty furthertoaninvestmentdecisionoftheen- tity and subsequently transferred to the same entity, suchentitywouldbe consid- eredas anoriginal lender. Participation in primary syndication was also deemed to be a lending activity. Currently, the regu- lator’s position andmarket practice seem to be that loan origination is considered clearly in-scope (i.e., potentially subject to a lending license requirement, if no ex- emption (see point 3. below) were to apply), loan acquisition or participation may be in scope, and acquisitions of debt instrumentssuchasbondsornoteswould nottypicallybeconsideredasconstituting a lending activity subject to a license. iii. The requirements for a Luxembourg lending license An entity performing a lending activity fromor inLuxembourg requires a license as“professionalperforminglendingoper- ations”. (6) To obtain a lending license, a number of requirements have to be met, concerninginparticular(i)theentity’scen- tral administration and infrastructure (which requires substantial management and other staffing inLuxembourg), (ii) its shareholding, (iii) the professional stand- ing andexperience ofmembers of the ad- ministrative, management and supervi- sory bodies and of any shareholderswith a qualifying participation into the equity oftheLuxembourgentity,(iv)substantial amounts of capital base and own funds, and (v) external auditing. (7) Obtaining the lending license involves substantial costs (including one-off and annual licensing fees and the costs of staffing of the Lux- embourgpresence), a significant time in- vestment (up to 12 months from the moment anapplication isfiled) andcom- pliance with ongoing professional obli- gations, prudential requirements, and rules of conduct. Beingcapturedbythelicenserequirement is therefore something that credit funds may want to avoid (though we do from time to time come across certain funds who, on the contrary, are looking to be regulated inLuxembourg). 2.Are funds in or out of scope of a lending license requirement? The key question is whether investment funds intending to originate loans or oth- erwiseinvestindebtarepotentiallycaught by the lending license requirement. i. Statutory exclusions Certain entities are excluded from the scope of application of the LFS, including certain types of investment funds. In par- ticular, undertakings for collective invest- ment in transferable securities ( UCITS ) authorized under Part I of the law of 17 December 2010 relating to undertakings for collective investments, as amended (the 2010Law ),undertakingsforcollective investmentauthorizedunderPartIIofthe 2010 Law ( Part II UCIs ), specialized in- vestment funds ( SIFs ) governed by the lawof13February2007relatingtospecial- ized investment funds, as amended (the 2007 Law ), certain pension funds, and in- vestment companies in risk capital ( SICARs ) governedby the lawof 15 June 2004relatingtoSICARsareexcludedfrom the LFS and are therefore not subject to a licenserequirementforlendingactivities. (8) ii. Regulatorypermissions European long-term investment funds (ELTIFs), European social entrepreneur- ship funds (EuSEFs), and European ven- ture capital funds (EuVECAs) are expresslypermittedtograntloans,subject to specific conditions set out in their re- spective EUregulations. (9) iii. The case of unregulatedAIFs Somealternativeinvestmentfunds( AIFs ) asdefinedbythelawof12July2013onal- ternative investment fund managers, as amended(the AIFMLaw ),mayhowever be captured by the LFS.Although all Part IIUCIs qualifyasAIFs byvirtueofArticle 88-1ofthe2010Law,notallAIFsnecessar- ily qualify as Part II UCIs. This is the case for certain unregulated funds, including many funds taking the formof a Luxem- bourg special limited partnership ( société en commandite spéciale or “SCSp”). Certain funds which are not covered by the product-specific laws and regulations mentionedabovemaytherefore,intheory, be caught by the license requirement for lending activities. As mentioned under paragraph1(a)(ii) above, thiswouldbean issuemostly for loanorigination andpar- ticipation/acquisition, but not for the in- vestment in bonds, notes, or similar instruments. iv. Supervisory tolerance Although certainAIFs are theoretically in scopeofthelicenserequirementsetoutby the LFS, the CSSF has provided some guidanceonlendingactivitiesexercisedby AIFs in its FAQ on the AIFM Law (the AIFM FAQ ). (10) According to this FAQ, loan origination, loan participation and loanacquisitionarepermittedactivitiesfor AIFs in Luxembourg, mainly because suchactivityisnotprohibitedbytheAIFM Law or other product laws and regula- tions applicable toAIFs. (11) The CSSF expects alternative investment fundmanagers( AIFMs )andAIFstocom- ply with all applicable requirements, in- cluding those stemming from specific product laws or regulations, and also re- quires AIFMs and AIFs to ensure they manage risks appropriately andhave ap- propriate organizational and governance structures in place in order to be able to perform the lending activities. (12) Despite theCSSF’spositionintheAIFMFAQ,itre- mains unclear howeverwhether unregu- latedAIFsarecompletelyexemptfromthe licensing requirement set out in the LFS if they engage into lending activities. It is likely however thatmost loan originating funds would be able to benefit from the professionalexemptiondescribedinpara- graph 3 below. v.What about SPVs heldby funds? As mentioned above, funds often use SPVs they own or control as vehicles to performlendingactivities. TheCSSF con- sidersthatwhereanSPVgrantingloansis held at 100%or directly or indirectly con- trolledbyaregulatedentitythatisitselfex- empted from the provisions of the LFS, that SPV is also exempted from the LFS.(13) In otherwords, if aUCITs, a Part II UCI, a SIF, a pension fund, or a SICAR for instance grants loans through a SPV it ownsat100%orcontrols,thatSPVwillnot be subject to the authorization require- ment set out in theLFS. If theSPVishow- ever owned or controlled by an AIF for which the applicability of the LFS is un- clear, the risk remains that such SPV shouldobtain the appropriate license. vi. The case ofNPLs The law of 15 July 2024 on the transfer of non-performing loans ( NPLs ), which transposes Directive (EU) 2021/2167 of 24November2021oncreditservicersand credit purchasers (the NPL Law ), intro- ducedanamendmenttoArticle28-4ofthe LFS, which now states that it does not apply to the activities of credit purchasers that are subject to theNPLLaw. A“credit purchaser”within themeaning oftheNPLLawmeans“ anynaturalorlegal person,otherthanacreditinstitution,thatpur- chasesacreditor’srightsunderanon-perform- ing credit agreement, or the non-performing creditagreementitself,inthecourseofitstrade, business or profession .” (14) As a result, debt funds, including those AIFsthatarepotentiallyinscopeofArticle 28-4LFSasdescribedabove,wouldbeout ofscopeofthelicensingrequirementtothe extenttheirloanacquisitionsarelimitedto the acquisition of NPLs (although they would, in such case, be subject to the obli- gations imposed on credit purchasers under theNPLLaw). 3. Available exemptions to a Luxem- bourg lending license Despite the position expressed by the CSSF in theAIFMFAQ, a doubt remains as towhether unregulatedAIFs are com- pletely exempt from the LFS. In this re- spect it is important to note that there are a number of exemptions from the licens- ing requirement for lending activities that entitiessubjecttotheLFSmayavailof,and that those AIFs may therefore rely on in order to avoid the need for a license. AlendinglicenseunderArticle28-4ofthe LFS is not needed if: (i) the loans are provided on a “one-off” basis andnot as a repetitive activity; (15) (ii) the loans are granted intra-group (the notion of group for these purposes being however interpretedvery strictly); (16) (iii) the loans areprovided toa limitedcir- cleofpreviouslydeterminedpersons; (17) or (iv) the nominal value of the loans amounts toat least EUR3,000,000and the loans are granted exclusively to profes- sionals as defined in the Luxembourg ConsumerCode ( Code de la consommation ) (the “Professional Exemption”). (18) It is important to consider that lenders without a license relying on one or more of these exceptions need to evaluate that eachindividualloangrantedbytheentity falls into one of the exceptions. An entity is not exempted by itself, instead each act of lending requires a reevaluation of the previously reliedon exemption. It is unlikely that debt funds, whose ac- tivity by definition is to invest in debt, would be able to benefit from the first twoexemptions. The “limitedcircle”and theProfessional Exemptionare therefore the most relevant, assuming a licensing risk exists. The CSSF does not detail what a “limited circle of previously determined persons” means; in practice, such a “limited circle” is generally composed of borrowers that share a certain number of characteristics whichmakesthemclearlyidentifiablebe- fore the granting of the relevant loans. ConcerningtheProfessionalExemption,a “professional” within the meaning of the Consumer Code is a natural or legal per- son, public or private, which acts for pur- poses relating to his/her/its professional activity. (19) Wheretheloansgranted(orac- quired) by a debt fund are made to com- panies, there should therefore be no issue for this exemption to apply to the extent thenominalvalueoftheloansamountsto at least EUR 3,000,000 (or the equivalent amount in another currency). Conclusion Credit and other funds using Luxem- bourg SPVs for originating or holding loans should consider their structure and plannedinvestmentstrategyandwhether it leads to regulatory impacts in Luxem- bourg.Assumingafundintendstoinvest in debt, they should ensure that they can benefit from existing exclusions or ex- emptions prior to investing. Note that, generally, it is not only advis- able for the board of managers/directors of the relevant Luxembourg SPV to con- sider the lending license criteria and ex- emptions at board level (and ensure a traceability of the reasoning followed or relevant facts) but also, where the appli- cation of an exemptionmay not be obvi- ous, to submit a demand to the CSSF for a negative clearance letter. Finally, the exemptions hearted in the CSSF Q&A are subject to change as they haveinthepast,oftenwithoutmuchnoti- fication or prior consultation so it is also advisable to double check whether they are still inplacewhen relevant. Finally, on 26March 2024, Directive (EU) 2024/927amendingDirectives2011/61/EU and 2009/65/EC ( AIFMD 2 ) was pub- lished in the Official Journal of the Euro- peanUnion. (20) Oneof theobjectives of the proposalforAIFMD2wastocreateanin- ternalmarketforloan-originatingfundsin ordertoincreasetheavailabilityofalterna- tive sources of funding for the real econ- omy. (21) As a result, AIFMD 2 nowallows loan origination by AIFs, subject to com- pliancewith certain requirements and re- strictions. Transposition of AIFMD 2 into thelawsofEUMemberStatesmustoccur by 16April 2026. Inaddition, it is important tonote that the recentlyadoptedDirective(EU)2024/1619 (CRDVI) (22) introduces a restrictionon the provisionof certainbanking services – in- cludinglending–bythird-countryunder- takingsintotheEUonacross-borderbasis. The restrictionon lendingactivitieshow- ever onlyapplies to third-countryunder- takings that would qualify as a credit institutionor a certain typeof investment firm if they were established in the EU, meaning that cross-border lendingactiv- ities by third-country funds are unaf- fected. (23) Please have a look at the following articles if you are looking for more details on the setting up of a Lux- embourg debt- or credit fund, and information about capital-raising in Europe. Debt funds, Luxembourg SPVs, and the regulation of lending activities 1) ALFI/KPMG Private Debt Fund Survey 2024. https://lc.cx/Lm-YIl 2)SpecialPurposeVehicle. 3)CSSF,QuestionsandAnswersontheStatusesof “PFS”–PartII(versionof15June2021),Q52,p.46, para.d. 4)Art.28-4LFS. 5)CSSF,QuestionsandAnswersontheStatusesof “PFS”–PartII(versionof15June2021),Q52,p.47, para.e. 6)Art.14andArt.28-4LFS. 7)Art.17-22LFS. 8)Art.1-1(2)LFS. 9 Regulation (EU) 2015/760 of the European Par- liamentandoftheCouncilof29April2015onEu- ropean long-term investment funds, Regulation (EU)No346/2013oftheEuropeanParliamentand oftheCouncilof17April2013onEuropeansocial entrepreneurship funds, and Regulation (EU) No345/2013oftheEuropeanParliamentandofthe Councilof17April2013onEuropeanventurecap- italfunds. 10) CSSF, Luxembourg law of 12 July 2013 on al- ternative investment fund managers – FAQ, ver- sion19,June2021. 11) CSSF, Luxembourg law of 12 July 2013 on al- ternative investment fund managers – FAQ, ver- sion19,June2021,Q22,p.79-79. 12) Ibid. 13) CSSF, Questions andAnswers on the Statuses of “PFS” – Part II (version of 15 June 2021), Q52, p. 46,para.c. 14)Art.1(2)NPLLaw. 15) CSSF, Questions andAnswers on the Statuses of “PFS” – Part II (version of 15 June 2021), Q52, p. 46,para.c. 16Art.1-1(2)(c)LFS. 17) CSSF, Questions andAnswers on the Statuses of “PFS” – Part II (version of 15 June 2021), Q52, p. 46,para.c. 18) Ibid. 19 Luxembourg Consumer Code ( Code de la consommation ),Art.L.010-1.(2). 20)Directive(EU)2024/927oftheEuropeanParlia- mentandoftheCouncilof13March2024amend- ing Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management,supervisoryreporting,theprovision ofdepositaryandcustodyservicesandloanorigi- nationbyalternativeinvestmentfunds. 21)COM(2021)721final,p.5. 22) Directive (EU) 2024/1619 of the European Par- liamentandoftheCouncilof31May2024amend- ing Directive 2013/36/EU as regards supervisory powers,sanctions,third-countrybranches,anden- vironmental,socialandgovernancerisks. 23)Art.1(13)CRDVI(futureArt.47(1)ofDirective 2013/36/EU,asamendedbyCRDVI).