18 May 2015

Good news for Debt Funds: BaFin paves debt funds’ way to Germany

By changing its present administrative practice regarding license requirements for non-bank lenders, the Federal Financial Supervisory Authority (BaFin) has made a remarkable step forward. 

Accordingly, certain Alternative Investment Funds (AIF) within the meaning of the Kapitalanlagegesetzbuch (KAGB) will be permitted to grant loans for the account of the investment fund. In addition to the mere granting of loans, restructuring and prolongation of loans will also be permitted in such cases.

For certain AIF covered by the KAGB, this means the following:

  • In contrast to the present administrative practice, initial lending to corporate entities will generally be permitted, whereas lending to consumers should be avoided. 
  • Subsequent amendments of the terms and conditions of a loan or the deferral of loans (so-called restructuring) will also be permitted for these funds. 
  • Finally, prolongation of loans (e.g. by amend-to-extend) shall be permitted as well. 

BaFin thereby establishes various new investment opportunities in Germany for funds and investors by means of this ground-breaking change of paradigm within the current low interest environment.

Nevertheless, it is important to note that BaFin has explicitly stated that the national legislator will soon incorporate regulations for lending, restructuring and prolongation into the KAGB. In connection with this, specific legal requirements, such as those regarding the size of loans granted as well as risk and liquidity management, are not to be ruled out. 

Therefore, the BaFin circular already includes suggestions in relation to lending to consumers, leverage restrictions, risk management, risk spreading, maturity transformation and minimum liquidity. 

From the Alternative Investment Industry’s point of view, one can only hope that the BaFin recommendations anticipate certain potential legislative campaigns. Otherwise, the adjustment of business models may become necessary after the new legal regulations come into effect.

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