The notion of leverage in the context of the AIF Law

The FSMA examined the question of the conditions under which an AIF manager (AIFM) that has received loans from shareholders may use leverage within the meaning of the Law of 19 April 2014. This question arises in particular in relation to the obligation of the AIFM in question to apply for authorization or whether it may simply register as a small AIFM.

AIFMs that manage only AIFs that do not employ leverage and that do not grant redemption rights in the first five years after the initial investment are required to obtain authorization only if the assets under management exceed EUR 500 million. Otherwise, the applicable threshold is EUR 100 million.

The concept of leverage is defined in Article 3, 58° of the Law of 19 April 2014 as designating 'any method by which the AIFM increases the exposure of an AIF it manages, whether through borrowing cash or securities, through derivative positions or by any other means'.

Generally speaking, the FSMA is of the opinion that it is acceptable to consider that loans do not constitute leverage within the meaning of the Law in cases where they are an economic substitute for the AIF's capital. In such cases, the manager cannot be considered to be increasing the exposure of the AIF as a result of the loan.

For the above reason, the FSMA takes the view that loans meeting the conditions set out below do not constitute leverage:

• the loans in question are made by the AIF's shareholders, to the exclusion of any other person. The loans are inseparably linked to the shares held by the shareholder in question: if the shares are sold, the loan in question is also transferred. Moreover, each shareholder shall subscribe loans in proportion to its participation;
• the loans in question are fully subordinated to all other claims (other than similar shareholder loans), whatever their origin, and are not secured by any pledge of the AIF's assets;
• interest payments may not be suspended by the AIF without incurring late payment charges (or another financial sanction); and
• the maturity of the loans in question is no earlier than the AIF's maturity date.  A default by the AIF does not render the loans immediately due. The loans cannot in principle be repaid early, unless the AIF itself should decide otherwise, under conditions that ensure the capacity of the AIF to meet its short- and long-term obligations.

We wish to emphasize that each dossier must be interpreted on the basis of its individual merits and that the interpretation depends on a case-by-case evaluation in terms of the general economic aspects of the operation concerned.

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