Introduction to Malta Loan Funds
On the 2nd of April 2014 the Malta Financial Services Authority issued 'Standard License Conditions applicable to Collective Investment Schemes authorised to invest through Loans' ("the Rules"). The rules appear to be influenced by the Regulation on European Venture Capital Funds and the Europe 2020 strategy. The issuing of these rules is a welcome development which brings more clarity to an area of law which needed it, enhances Malta's appeal and flexibility as a domicile for alternative investment funds and will also serve to increase the availability of credit for smaller companies.
This article provides an overview of the key requirements introduced by the rules, but it should be borne in mind at the outset that the Rules are of a supplementary nature, in that they need to be read in conjunction with the Standard License Conditions prescribed in the Investment Services Rules for Alternative Investment Funds/ Investment Services Rules for Professional Investor Funds. In the case of conflict it is the Rules that apply. Having said that, the rules largely mirror the standard license conditions except for a number of provisions specifically addressing the circumstances of loan issuing funds, and therefore the risk of conflict is contained.
Malta Loan Funds: Investing Through Loans
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 lender and the borrower.
Exclusive to unlisted companies and SMEs
The rules include an important restriction which states that Malta Loan Funds can only issue loans to ‘unlisted companies and SMEs’. The rules also include an anti-abuse provision which states that ‘any entity receiving a loan shall be prohibited from transferring such loan to a third party’.
Closed-ended structure
The rules require the fund to be a closed-ended fund. The rules define the term ‘closed-ended’ as referring to a collective investment scheme;
- which does not raise capital through the continuous sale of units or shares;
- has a fixed duration;
- the units of which can only be redeemed at the end of the duration of the scheme
Under Maltese law the structure that maps most closely to these requirements is that of the INVCO. However the rules do not impose a specific legal structure and therefore any legal structure that can satisfy the stated requirements ought to be acceptable.
Investment Restrictions
Malta Loan Funds are required to abide by a number of investment restrictions. An incomplete summary of the restrictions is provided below:
- Short-selling of securities is prohibited
- The fund may invest up to 30% of its assets in liquid securities
- The fund is required to invest not more than 10% of its assets in a single undertaking (the same rule applies to loan portfolios)
- 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 (with a maximum exposure of 20% to such funds)
- The Scheme may acquire not more than 25% of the units or shares of a single loan fund.
- The Fund may borrow, subject to restrictions
- The Fund is not permitted to use leverage or to reuse collateral
Eligible Investors
Investors in Malta Loan Funds can be of two types:
1. Professional investors as defined under MiFID
2. to investors who, on request, elect to be treated as professional clients in terms of Section II to Annex II to the MiFID and commit to investing a minimum of EUR 100,000.
Service Providers
A Malta Loan Fund is required to appoint the following service providers:
· Fund manager (unless it is a self-managed fund)
· Custodian
· Auditor
· External valuer (where applicable)
· Compliance officer
· Money laundering reporting officer
A note needs to be made here with respect to the Custodian. The rules establish a clear requirement for every Malta loan fund to appoint a Custodian; this is noteworthy as certain categories of funds in Malta, namely PIFs sold to Qualifying or Extraordinary investors are not usually required to appoint a Custodian. One would however expect Malta loan funds to be able to benefit from the depositary lite regime, meaning that they can appoint a category 4b license holder to this role, an important advantage that greatly widens the choice of service provider in this context.
With respect to the external valuer, this is an legal or natural person independent from the fund, the fund manager and any person with close links to either. The fund manager need not appoint an external valuer if the valuation task is carried out in a manner functionally independent from the portfolio management and credit granting function, and provided that measures are in place to manage conflicts of interest and undue influence on employees.
Credit Risk Management
The Rules require the fund manager to establish and implement a credit risk strategy and related policies in proportion with the scope and sophistication of the fund’s activities. The credit policy must establish the framework for lending and guide the credit granting activities of the Malta loan fund. It must include a risk appetite statement and address items such as target markets, portfolio mix, structuring of credit limits, processing and reporting.
Liquidity Management Policy
The fund manager is 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. Whilst this feature is already provided for in the provisions of the AIFMD, the rules seek to further build on this requirement using concepts normally applied in the banking sector. Notwithstanding that the scheme shall be structured as a closed-ended scheme, the fund manager may on a yearly basis opt to redeem and cancel any shares in accordance with the terms of the offer should the fund have excess liquidity. The Rules also make provision for the application of a variable NAV.
