AIFMD II Establishes Rules for Loan-Originating Funds

Directive (EU) 2024/927 of the European Parliament and of the Council (AIFMD II) represents the first systematic harmonization of rules for alternative investment funds that grant loans at the European Union level. It responds to the existing fragmentation of national legislation, which allowed for divergent regulatory approaches and created room for both regulatory arbitrage and the excessive concentration of credit risk. The transposition of AIFMD II into Czech law via an amendment to Act No. 240/2013 Coll., on Investment Companies and Investment Funds (ZISIF), therefore fundamentally alters the substantive legal framework governing loan-originating funds. The aforementioned ZISIF amendment has already been approved by the Chamber of Deputies and the Senate, signed by the President of the Republic, and is currently in the stage preceding publication in the Collection of Laws.

The ZISIF amendment explicitly includes the granting of loans and the acquisition of debt claims arising from fund loans within the scope of managing investment funds. A debt claim arising from a fund loan means not only a claim arising from a credit or loan agreement concluded directly on behalf of the fund as a lender, but also a claim assigned to the fund, provided that the manager participated in structuring the loan or in pre-negotiating its parameters. The new regulation thus also applies to indirect forms of credit exposure and limits the possibility of circumventing the rules through subsequent acquisitions of debt claims.

Crucial emphasis is placed on the manager's obligations in the areas of credit policy and risk management. The manager of a loan-originating fund must establish, implement, and maintain effective policies, procedures, and processes for granting loans, assessing borrowers' creditworthiness, and managing and continuously monitoring the credit portfolio. This framework must also include rules for addressing cases of borrower default. These mechanisms are subject to regular review, at least annually, thereby strengthening the manager's accountability for ongoing credit risk management.

Furthermore, the substantive legal framework introduces concentration limits and leverage restrictions. A fund may not grant loans exceeding 20% of its capital to a single borrower if that borrower is a selected financial institution or another fund. At the same time, leverage limits are established at a maximum of 175% of the fund's net asset value for open-ended loan funds, and 300% for closed-ended funds. The regulation is underpinned by a preference for closed-ended fund structures, with the open-ended format being permissible only exceptionally and upon meeting stricter liquidity management requirements.

Another significant change is the restriction on business models and the circle of eligible borrowers. The amendment prohibits the originate-to-distribute strategy—whereby a fund would grant loans exclusively for the purpose of their subsequent sale—and introduces an obligation to retain a portion of the risk exposure upon the transfer of a loan. Simultaneously, granting loans to related parties, in particular the manager, its employees, or the depositary, is prohibited, and the provision of consumer loans by investment funds is explicitly excluded. The new regulation thus creates a unified and predictable framework for loan funds, enhancing risk management standards and contributing to market stability while preserving their role as an alternative source of financing for business entities.