A Luxembourg fund established as an alternative investment fund (AIF) subject to the EU AIFM directive must appoint an alternative investment fund manager (AIFM). The latter is responsible for the portfolio management and the risk management functions.
As part of its duties, an AIFM must set a maximum level of leverage for each AIF it manages and must determine the extent of the right to reuse collateral or guarantees that could be granted under any leverage arrangement. Leverage is defined under the AIFM law as any method by which an AIFM increases the exposure of the AIF it manages, whether through borrowing of cash or securities, leverage embedded in derivative positions or by any other means. The AIFM must disclose certain information to the investors in the AIF, including the circumstances in which the AIF may use leverage, the types and sources of permitted leverage and the associated risks, any restrictions on the use of leverage and any collateral and asset reuse arrangements, and the maximum level of leverage. In addition, Luxembourg AIFMs have certain reporting obligations to the supervising authority in Luxembourg, being the Commission de Surveillance du Secteur Financier.
When an AIF or a special purpose vehicle owned by the AIF wishes to borrow under a net asset value (NAV) facility, the AIFM should be involved. The borrowing base of a NAV facility is calculated on the NAV of the eligible assets of the AIF (being the primary source of repayment) and the lenders have recourse to the portfolio investments of the AIF. Borrowings under a NAV facility may constitute leverage under the AIFM directive in certain situations and may therefore interact with the portfolio management and risk management functions of the AIFM. The AIFM’s consent may be needed for entering into the NAV facility and it is thus crucial that the AIFM is involved in the negotiation of the financing transaction as soon as possible.
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