Loan participating funds & the NPLD

On 18 July 2024, the Law of 15 July 2024 (the “NPL Law”), implementing Directive (EU) 2021/2167 of 24 November 2021 on credit managers and credit purchasers and amending Directives 2008/48/EC and 2014/17/EU (the “NPLD”), was published in the Official Journal of Luxembourg. The NPLD and NPL Law seek to address the issue of non-performing loans being piled up by EU credit institutions. This contribution discusses the legal framework introduced for credit servicers and credit purchasers under the NPLD and its impact on Luxembourg loan participating funds.

Background

The NPLD has been adopted to addresses the issue of the piling up of NPLs held by EU credit institutions. For that purpose, the NPLD introduced two viable solutions. First, it introduced an EU legal framework for credit servicers to whom banks may outsource the servicing of these loans. Till the adoption of the NPLD, Member States regulate credit servicing activities to varying degrees leading to a fragmented European market for credit servicers. Consequently, credit servicers did not scale up on the European level. Second, the NPLD introduced an EU legal framework for credit purchasers that seeks to remove the legal impediments for the transfer of these loans to non-bank credit purchasers. Till adoption of the NPLD, the fragmented legal framework in Europe disincentivized credit purchasers to participate on the secondary market for (non-)performing loans issued by EU credit institutions. The NPLD legal framework applicable to credit servicers and credit purchasers, thus, impacts any fund or fund manager when investing in NPLs issued by EU credit institutions and any manager or adviser assisting in managing and monitoring such EU loans.

Loan participating funds & credit servicers

Crucially, the NPLD, amongst others, exempts alternative investment fund managers (“AIFMs”) that are authorized and registered in accordance with Directive 2011/61/EU (the “AIFMD”) from the need to be authorized as a “credit servicer” within the meaning of the NPLD. However, the definition of “credit servicers” under the NPLD is very wide and the application of the “credit servicer” regime to other entities within fund structures, such as investment manager/advisors that are involved in loan participations on behalf of their loan participating funds is overlooked. It is, thus, currently unclear whether such entities are within the ambit of the NPLD. The same holds true for non-EU AIFMs and their (non-)EU AIFs. The exemption seems not to include non-EU AIFs that are in one or more EU Member States registered for marketing purposes under the AIFMD. Hence, non-EU AIF(M)s potentially fall within the ambit of the NPLD and, if so, are required to engage a locally licensed entity as a credit servicer.

Loan participating funds as credit purchasers

Non-banks, including loan participating funds, are heavily involved as lenders in primary syndications and buyers in the existing secondary loan market. For that reason, the NPLD sets out a number of requirements to the making of transfers of loans issued by EU credit institutions to non-banks. These include:

• A general duty of loyalty/care: Credit purchasers are required by the NPLD to always act in good faith, treat borrowers fairly and respect their privacy;

• Obligations for Credit Purchasers:

  EU credit purchasers: are required to appoint an EU credit institution, credit servicer or professional lender (together: “Servicers”) for credit servicing activities with respect to NPLs concluded with consumers;

  Non-EU credit purchasers: Its representative must appoint a Servicer with respect to credits granted to natural persons, including consumers and independent workers, or of credits granted to SMEs.

• Use of Servicers: (non-)EU credit purchasers (through their representative) are obliged to notify their relevant Competent Authorities of the use of Servicers;
  Representative in the EU: Non-EU credit purchasers to which a NPL issued by an EU credit institution is transferred, is required to appoint an EU representative.
• Communication of NPL transfers: After a transfer of a NPL to a credit purchaser, the credit purchaser (or Servicer) are required to provide information in relation to the transferred NPLs to the borrower;
• Reporting Duties: Credit purchasers transferring NPLs are also required to inform their Competent Authority of certain characteristics in relation to NPLs they have transferred.

Outlook: Remaining uncertainties with respect to the scope of the NPLD and Loan Participating Funds

Although the NPLD took already effect 28 December 2021 with the deadline for implementation in all Member States being 29 December 2023, several Member States, including Luxembourg, have not made it in time or recently implemented the directive. Therefore, still varying approaches/interpretations with respect to the (scope of the) NPLD in relation to loan participating funds are to be expected. 

In particular, the NPLD has not explicitly carved out delegated investment managers and investment advisors that assist AIF(M)s in managing and monitoring NPLs from its scope. Depending upon the interpretations applied, this could lead to additional compliance costs in relation to the credit servicers regime. Given that, in accordance with the CSSF AIFMD Q&A, AIFMs are required to have an appropriate organizational and governance-structure for managing/monitoring NPLs in place, it is to be hoped that, at least, investment managers/advisors of Luxembourg AIF(M)s are benefitting from the exemption from the credit servicing requirement as well.

Sebastiaan Hooghiemstra  is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg and senior fellow/guest lecturer of the International Center for Financial Law & Governance at Erasmus University Rotterdam. The law firm is a member of Investment Officer’s panel of experts.