AMF consultation on the ability of French funds to grant loans

On 22 October 2015, the French financial markets authority (the Autorité des Marchés Financiers or AMF) launched a public consultation on the current legal restriction on French investment funds granting loans.

French investment funds cannot currently grant loans directly to borrowers, despite an exemption from the banking monopoly rule that permits them to purchase fully funded loan receivables.

This restriction is being reconsidered as a result of the implementation of the European ELTIF Regulation (Regulation (EU) 2015/760 of 29 April 2015 on European long-term investment funds (ELTIF)), which comes into force in December 2015 and will allow ELTIFs to grant loans in specific conditions. In France, however, even if an investment fund wanted to structure itself as an ELTIF, it could not benefit from the ELTIF Regulation rules on granting loans as the French domestic legislation prohibits it.

The AMF has launched this consultation to consider changing the domestic rules so that French investment funds could grant loans directly to borrowers which, in turn, would allow them to make full use of the ELTIF regime. The consultation focuses on the five areas of discussion summarised below.

1. Restrictions on the management company

The AMF suggests amending (and reinforcing) the existing constraints relating to the licence required for management companies whose funds purchase and manage loan receivables, rather than creating a new specific licence for management companies managing funds who wish to grant loans. In particular, the AMF suggests adding the obligation to conduct risk assessments when investing in loans or credit funds which is a requirement that is already in place for insurance companies investing in loans.

Currently, management companies that are authorised to purchase and manage loan receivables are not necessarily authorised under the AIFM directive and therefore are not subject to its rules. The AMF suggests that the rules implemented by the AIFM directive should fully apply to management companies managing funds that grant loans, as they are essential to the performance of this activity.

Finally, the AMF is also proposing that, in addition to the AIFM directive rules relating to conflicts of interest, management companies should appoint an external and independent expert to assess the risk of a loan when it is granted to a company which has a direct capital link with the management company.

2. Types of funds that could grant loans

According to the AMF, only three types of funds should be authorised to grant loans. They are: (i) professional specialised funds (fonds professionnels specialisés); (ii) securitisation vehicles (organismes de titrisation); and (iii) professional private equity funds (fonds professionnels de capital investissement). These funds are marketed exclusively to professional investors and should be closed-ended or at least limit redemptions to a certain proportion of the assets of the fund as specified in the fund's constitutional documents.

Other investment funds could only grant certain forms of loans in limited circumstances where they are expressly permitted by law (overdraft or equity loans, for instance, are eligible in a limited proportion of the assets of certain investment funds).

3. Restrictions on granting loans

The AMF suggests that investment funds which grant loans must be subject to specific conditions.

Such funds would be prevented from using leverage, entering into short selling, securities lending and repurchase transactions, or derivative transactions (except if derivative transactions are used for the purpose of hedging the risk inherent to the other investments made by the fund).

4. Restrictions on the types of borrower and loans

The AMF sets out certain conditions on the types of loans and borrowers that a fund must comply with. These include:

• the loan should only be granted to non-financial entities or corporations (which means that loans cannot be granted to individuals); and
• loans must have a maturity date of at least two years and be shorter than the lifetime of the fund.

In certain circumstances, loans could be granted to holding companies. The AMF consultation also suggests that the scope of eligible borrowers could be limited to European entities. However, there is no limitation proposed relating to the credit quality of the borrowers or the existence of collateral arrangements.

5. Debt collection

Debt collection is regulated by the French Civil Procedure Code, and the AMF suggests that no further additional rules are required. However, if a management company wants to collect its debt, it should make sure that the proceeds collected from a defaulting borrower are used for the sole benefit of the fund and that any fees or charges incurred in this activity are clearly set out in the fund's constitutional documents.

The consultation is open until 4 December 2015.