Anthony O'Hanlon and Conor Lynch

The Central Bank has also clarified two key points for Irish funds engaged in loan origination, offering greater certainty for financing activities. Our Fund Finance and Investment Funds teams examine these developments.

The Central Bank of Ireland (Central Bank) released a revised version on 7 March 2025 of its AIFMD Questions and Answers document (Revised Q&A). This welcome guidance from the Central Bank under the Revised Q&A has been issued in advance of an expected upcoming consultation process for the Central Bank’s AIF Rulebook. The Central Bank is expected to commence a consultation process on proposed updates to its AIF Rulebook shortly, in preparation for the implementation of AIFMD II by the April 2026 European deadline.

By way of background, the Central Bank’s AIF Rulebook prohibits Irish qualifying investor alternative investment funds (QIAIFs) from granting loans or acting as a guarantor on behalf of a third party. This prohibition has been interpreted very widely since its inception and construed as a complete prohibition on the giving of guarantees by a QIAIF regarding any obligations of any other party (other than wholly owned subsidiaries). This prohibition had previously proved problematic in Irish fund financing transactions where it was expected that an upstream or other entity within the structure would guarantee the borrowing of another entity within the structure.

This prohibition regularly arises in the context of subscription line facilities where the QIAIF is a feeder fund (and not the underlying borrower). In those circumstances, a workaround has been available whereby a “cascading security” arrangement is implemented. Some readers may be familiar with this approach in non-Irish structures, for example in the context of restrictions on granting security under ERISA. An example of a “cascading security” arrangement is as follows:

• The non-borrowing feeder fund granting a charge and security assignment in favour of the master fund over both (i) the feeder fund’s uncalled commitments from its investors and (ii) the bank accounts which those capital calls are to be paid into (the Feeder Security Document), as security for its obligation to fund capital commitments to the master fund, and
• The master fund in turn granting a charge and security assignment in favour of the lender over (i) its uncalled commitments from the feeder fund (and any other investors), (ii) the bank accounts which those capital calls are paid into and (iii) its rights under the Feeder Security Document, as security for its borrowings from the lender.
  Where a cascading security structure such as this is implemented, the lender can enforce directly against the feeder fund. This is done by enforcing the security granted by the master fund under the Feeder Security Document.

Irish QIAIFs acting as guarantors

In a significant development, the Central Bank has clarified that QIAIFs may provide a guarantee for investments and/or intermediate vehicles for such investments in which that QIAIF has a direct or indirect economic interest provided:

1. Such arrangements are determined by the QIAIFs alternative investment fund manager (AIFM) to be in the best interests of both the QIAIF and its investors and are ancillary to the QIAIF’s predominant investment strategy.
2. The AIFM (or in the case of a non-Irish AIFM or registered AIFM, the authorised QIAIF) and the QIAIF’s depositary confirm that the proposed transaction is at arm’s length and in the best interest of investors.
3. The prospectus discloses to investors that the QIAIF can provide a guarantee for investments and/or intermediate vehicles for such investments in which the QIAIF has a direct or indirect economic interest, along with any associated material risks.
4. The liability of investors in the QIAIF under such arrangements (above the value of their current holdings of shares or other interests in the QIAIF) shall be limited to the amount, if any, unpaid on the shares or other interests held by them which shall include, in the case of a QIAIF that raises capital under a formally agreed capital commitment basis, the amount of the undrawn capital commitments in accordance with the prospectus and the constitutional document of the QIAIF.
5. The Qualifying Investor QIAIF complies with provisions of Central Bank ID 1159[1] of a previous version of the Q&A.
6. The AIFM must comply with the relevant requirements under AIFMD as applicable to leverage and its risk management, including regularly conducting stress tests in accordance with Article 48 and other applicable requirements of AIFMD which shall cover market risks and any resulting impact, including on margin calls, collateral requirements and credit lines.

Loan originating QIAIF updates

The Revised Q&A also include two important clarifications for loan originating QIAIFs.

Firstly, the Central Bank has clarified the meaning of “financial institutions” for the purpose of the prohibition on loans to these entities. Accordingly, only loans to the following types of financial institutions are prohibited which provides welcome clarity to Irish loan originating QIAIFs:

• A credit institution or a financial institution or an ancillary services undertaking within the meaning of the CRD IV Directive
• An insurance undertaking, reinsurance undertaking or an insurance holding company within the meaning of the EU Solvency II Directive
• An investment firm with the meaning of MiFID, or
• A mixed financial holding company within the meaning of the EU Financial Conglomerates Directive.

Separately, the Central Bank has outlined an important carve-out for loan originating QIAIFs which are prohibited under the AIF Rulebook from issuing loans to persons intending to invest in equities or other traded investments or commodities. The Central Bank has clarified that the prohibition on lending to persons intending to invest in equities or other traded investments or commodities does not prevent lending to a borrower with the specified intention of acquiring only equity, debt or other equity or debt related securities to obtain a controlling interest in a target company.

Conclusion

The clarification provided by the Central Bank under its Revised Q&A is a welcome development and a positive indicator of the Central Bank’s commitment to further enhancing and streamlining Ireland’s private funds offering. However, as readers will note, there are still a number of factors above which market participants need to be aware of prior to any QIAIF giving a guarantee. Ultimately, each transaction will need to be reviewed on a case-by-case basis to ensure it is appropriate for the guarantee to be given in the circumstances. Where there is any uncertainty, implementing a cascading security structure will continue to be a neat solution where possible in the transaction structure.

Separately, the changes related to the loan originating QIAIFs are also welcome clarifications from the Central Bank and add to Ireland’s existing and robust private credit offering.

• Anthony O’Hanlon and Conor Lynch are both partners at Mason Hayes & Curran LLP, where this article was first published.