The Malta Financial Services Authority (“MFSA”) issued ‘Standard License Conditions applicable to Collective Investment Schemes authorized to invest through Loans’ (“The Rules”).
The issuing of these rules shed light on this area of law, providing clarity and making Malta a more appealing and flexible domicile for alternative investment funds. Collective Investment Schemes that are established to carry out investments through loans, whether licensed as AIFs or PIFs, are to comply with the Standard License Conditions set out in the MFSA rule book, in addition to any other laws. In case of a conflict between The Rules and the conditions prescribed in the Investment Services Rules for AIFs/PIFs, The Rules shall prevail.
Investing Through Loans
The rules are designed to apply to funds whose investment objective or strategies include direct lending or the acquisition and subsequent management of loans or portfolios of loans as a means of generating an investment return or gain for the fund and its investors. Investing in or acquiring transferrable securities is not lending. Likewise, efficient portfolio management or treasury management techniques such as securities lending, are not considered to be lending for the purposes of The Rules.
For the purposes of the rules, the term ‘investing through loans’ is understood to mean: The direct origination of loans by the scheme; or 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 the lender and the borrower.
The MFSA interprets the activity of loan origination as consisting in the granting or issuing of a loan or credit as lender or co-lender to a third party as borrower. The scheme may issue loans solely and exclusively to unlisted companies and SMEs.
The rules require the fund to be a closed-ended fund, defined as a collective investment scheme;
- Which does not raise capital through the continuous sale of units or shares;
- Which has a fixed duration;
- The units of which can only be redeemed at the end of the duration of the scheme.
Under Maltese Law, closed-ended funds usually take the form of an investment company with a fixed share capital (“INVCO”). However, any legal structure that can satisfy the criteria ought to be acceptable.
Eligible Investors & Service Providers
Loan funds are available to professional investors as defined by MiFID, or to investors who, on request, elect to be treated as professional clients in terms of the MiFID provisions, and commit to investing a minimum of €100,000.
The loan fund is required to appoint a Fund Manager, Custodian, Auditor, External Valuer, Compliance Officer, and a Money Laundering Reporting Officer.
The fund manager is required to establish and implement a credit risk strategy and related policies in proportion to the scope and sophistication of the fund’s activities. The credit policy shall establish the framework for lending and guide the credit-granting activities of the scheme. It shall include a risk appetite statement and shall address items such as target markets, portfolio mix, structuring of credit limits, processing and reporting. The policy shall also reflect the risk tolerance and the level of profitability which the fund manager expects the scheme to achieve for incurring various credit risks.
Liquidity Management Policy
The fund manager is also required to employ an appropriate liquidity management system and adopt procedures which enable the monitoring of liquidity risk of the fund and ensure that the liquidity profile of the scheme complies with its underlying obligations.
The Rules lay down the following restrictions:
- The scheme shall not be allowed to short-sell any securities.
- The scheme may invest up to 30% of its assets in liquid securities.
- The scheme shall invest not more than 10% of its capital in a single undertaking.
- The scheme shall invest not more than 10% of its capital in units or shares of one or several other loan funds provided that these funds operate within the same investment restrictions applicable under The Rules.
- The scheme may acquire not more than 25% of the units or shares of a single loan fund.
- The scheme may borrow cash provided that such borrowing fulfils all of the conditions laid down in The Rules.
- The use of leverage and the reuse of collateral by the scheme are not permitted.
Acquisition Of An Existing Portfolio Of Loans
Where a scheme purchases an existing portfolio of loans from a credit institution, the fund manager shall ensure that the credit institution had carried out the required due diligence and credit risk analysis at the origination stage. Prior to taking over the existing portfolio of loans, the scheme shall carry out its own independent credit risk analysis of the underlying assets of the portfolio and review the terms of the take-over contract and shall ensure that these conform to the conditions and terms of disclosure in the Scheme’s offering documents.