Direct Lending Funds in Germany- Proposed Compliance Guidelines

December 01, 2016

As summarized in previous Dechert OnPoints1 , Germany has introduced a framework for direct lending funds in March 2016 by enacting the UCITS V Implementation Act (the "Act").2 The changes implemented by the Act also allowed certain non-German (particularly EU) funds to enter the German direct lending market. The revised regulatory framework has triggered a substantial interest in the debt fund industry, particularly in relation to foreign funds engaging in lending activities with German borrowers. Furthermore, institutional investors continue to show growing interest in this asset class and seem receptive to invest in attractive debt fund strategies. 

The looming changes of bank regulatory rules (including proposed changes under the new so-called “Basel IV” regime3 and advice by the ECB on leveraged loans4) will likely create further opportunities for direct lending funds in Germany and Europe. 

In Germany, there are currently two legislative/regulatory projects under consultation that will have an impact on direct lending funds in Germany: 

  • The “Minimum Requirements on Risk Management for Investment Companies” (Mindestanforderungen an das Risikomanagement für Kapitalverwaltungsgesellschaften - „KAMaRisk“)5, which will introduce specific compliance and risk management rules for direct lending funds in Germany. 
  • The draft Supervisory Supplementary Act (AufsichtsrechtergänzungsgesetzFinErgWohn)6, which will introduce potential restrictions for banks, but also funds providing real estate loans with a view to mitigate the risk of a "lending bubble" in the residential real estate market. 

This Dechert OnPoint summarizes the main aspects of these two projects. 

Draft Risk Management Guidelines (KAMaRisk) for Loan Funds by BaFin 

On 8 November 2016, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) has published a revised version of the InvMaRisk, the so-called “Minimum Requirements on Risk Management for Investment Companies” (Mindestanforderungen an das Risikomanagement für Kapitalverwaltungsgesellschaften - „KAMaRisk“)7 , for further consultation until 23 November 2016.

Minimum requirements for German AIFMs managing loan funds 

Since the origination of loans and the acquisition of unsecuritized (secondary) loans involves specific risks, the German Capital Investment Code (KapitalanlagegesetzbuchKAGB”) stipulates additional organizational requirements for AIFMs (AIF-Kapitalverwaltungsgesellschaft - “KVG”) which are granting loans for the account of AIFs (Direct Lending) or which invest into (secondary) loans. Such KVG must have adequate structures and procedures in place covering, in particular, credit processing, the management of non-performing loans, and the early detection of risks. 

The KAMaRisk provides further guidance on the required processes and will implement minimum risk management requirements for KVGs managing such debt funds either originating loans or investing into (secondary) loans. 

As already indicated by the legislative history of the Act and BaFin’s latest change of the administrative practice regarding debt funds, these requirements are largely based on the regulations for lending activities of German credit institutions pursuant to BA MaRisk.8 

No Application to Foreign Management Companies and Foreign Funds 

Pursuant to Sec. 2 No. 1 of the KAMaRisk, German KVGs will be subject to the requirements set out in the KAMaRisk. Foreign AIFMs, foreign AIF and German branches of EU management companies will generally not become directly subject to the compliance requirements on loan origination and on the minimum requirements regarding risk management as set out in the KAMaRisk. Rather, they will be subject to similar requirements in their respective home jurisdiction.9 

There is only one exception to this rule set out in Sec. 2 No. 1 of the KAMaRisk: EU-AIFMs and EU UCITS management companies managing German funds must comply with the requirements of the KAMaRisk to the extent these relate to fund related risk management requirements. 

No Application to Shareholder Loans 

As set out in Sec. 29 para. 5a KAGB in conjunction with Sec. 5 No. 2 of the KAMaRisk, the minimum requirements regarding risk management under KAMaRisk will not apply to shareholder loans.10 

As a consequence, shareholder loans (e.g. to real estate holding companies or other special purpose vehicles) will not be subject to further requirements set out in KAMaRisk. Pursuant to the grounds of the Act, shareholder loans shall be exempted from further requirements to support the practical need for corporate financing, private equity, venture capital and finance structuring through special purpose vehicles.11 

Draft Supervisory Supplementary Act (Aufsichtsrechtergänzungsgesetz – FinErgWohn) 

In June 2015, the Financial Stability Committee (Ausschusses für Finanzstabilität) recommended the creation of a legal basis which allows BaFin to introduce minimum requirements for the credit-based financing of residential property purchases (including, among other things, the minimum amount of equity that must be provided and minimum debt repayment rates), should such rules be regarded as necessary in the future. In this way, risks to financial stability arising from excessive debt and price bubbles on the real estate market should be limited.12 

Based on this recommendation, the Federal Ministry of Finance (Bundesministerium der Finanzen – BMF) has issued the draft Supervisory Supplementary Act (AufsichtsrechtergänzungsgesetzFinErgWohn)13 in order to prevent potential risks that may arise in the context of over-valuations on residential property markets for the financial stability. 

Impact on All Commercial Creditors in the Residential Real Estate Sector 

In order to avoid regulatory arbitrage and distortions of competition, all commercial creditors in the residential real estate sector (i.e. banks, insurance companies and investment management companies) will be subject to the new regulations. Hence, the new macroprudential rules also apply to loan funds. Accordingly, the new regulation leads to changes of the German Banking Act (Kreditwesengesetz), the German Investment Code (Kapitalanlagegesetzbuch) and the Insurance Supervisory Act (Versicherungsaufsichtsgesetz). 

Restrictions on New Loans 

The draft bill provides certain instruments for the German financial supervisory authorities to specify further criteria for creditors on granting new loans to prevent an imminent threat to the financial stability. 

Pursuant to the draft bill, the BaFin could e.g. 

  • restrict the maximum ratio of loans in respect to the relevant real estate value (Loan-To-Value); 
  • measure debt services by income; 
  • limit the ratio of total debt to income (Debt-Service-To-Income); 
  • determine time periods for the repayment of loans (amortization requirement). 

The prerequisites for such restrictions are threatening risks for the operational capability of the financial system and for the financial stability based on BaFin’s assessment and evaluations of the German Central Bank (Bundesbank). 

Exemptions for Refurbishment, Small Loans, Follow-up Financing and Social Housing 

Pursuant to the draft bill, loans for the refurbishment of residential property will not become subject to the Supervisory Supplementary Act. 

Also, BaFin may exempt certain types of loans and sectors from a general decree to restrict residential property loans, e.g.: 

  • small loans (de minimis limit); 
  • creditors may be allowed to grant a certain amount of new loans which will not have to comply with the prescribed restrictions; 
  • follow-up financing and social housing promotion may also be exempted from a general BaFin decree. 


1) New Legal Framework Regarding Loan Funds in Germany; Investment Funds Update: Europe- Issue 9, 2016; ESMA Lends Support for a Harmonised European Framework for Loan Origination Funds; New Legal Framework Regarding Loan Funds in Germany, New Guidance from BaFin on Debt Funds
2) Gesetz zur Umsetzung der Richtlinie 2014/91/EU des Europäischen Parlaments und des Rates vom 23. Juli 2014 zur Änderung der Richtlinie 2009/65/EG zur Koordinierung der Rechts- und Verwaltungsvorschriften betreffend bestimmte Organismen für gemeinsame Anlagen in Wertpapieren (OGAW) im Hinblick auf die Aufgaben der Verwahrstelle, die Vergütungspolitik und Sanktionen, Bundesgesetzblatt Teil I 2016 Nr. 11, 10.03.2016, S. 348 f
3) European Parliament Briefing, Upgrading the Basel standard: from Basel III to Basel IV?, PE 587.361
4) European Central Bank, Draft guidance on leveraged transactions, 23 November 2016
5) BaFin Reference WA 41-Wp 2137-2013/0029
6) Bundesministerium für Finanzen, Referentenentwurf, Gesetz zur Ergänzung des Finanzdienstleistungsaufsichtsrechts im Bereich der Darlehensvergabe zum Bau oder zum Erwerb von Wohnimmobilien zur Stärkung der Finanzstabilität (Aufsichtsrechtergänzungsgesetz – FinErg Wohn), as of 31 October 2016
7) BaFin Reference WA 41-Wp 2137-2013/0029
8) BaFin, Circular 10/2012 (BA) - Mindestanforderungen an das Risikomanagement – MaRisk, BaFin Reference BA 54-FR 2210-2012/0002
9) E.g. in case of Luxembourg: CSSF Frequently Asked Questions, concerning the Luxembourg Law of 12 July 2013 on alternative investment fund managers, 9 June 2016, Question 22
10) Shareholder loans pursuant to Sec. 240, 261 para. 1 no. 8, 282 para. 2 sent. 3, § 284 para. 5 or Sec. 285 para. 3 KAGB
11) Reg.Begr. BT-Drs. 18/6744, p. 47
12) The creation of such additional macroprudential instruments was also supported by international institutions responsible for questions of financial stability, namely the International Monetary Fund, the Financial Stability Board and the European Systemic Risk Board. Several other European countries have also recently upgraded their macroprudential instruments
13) Bundesministerium für Finanzen, Referentenentwurf, Gesetz zur Ergänzung des Finanzdienstleistungsaufsichtsrechts im Bereich der Darlehensvergabe zum Bau oder zum Erwerb von Wohnimmobilien zur Stärkung der Finanzstabilität (Aufsichtsrechtergänzungsgesetz – FinErg Wohn)

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