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Fund Finance Feature: Can an Irish Fund Provide Guarantees?
We are often asked whether Irish funds can provide guarantees. We set out a brief (and hopefully helpful) summary of this issue below.
An Irish fund can provide guarantees or security (hereinafter referred to as “credit support”) in respect of any 100% owned subsidiary. In the Irish fund finance sector, we would see such credit support provided relatively frequently within regulated fund group structures.
However, the AIF Rulebook issued by the Central Bank of Ireland restricts an Irish regulated fund from acting as a guarantor on behalf of third parties. The reference to “guarantor” in the Rulebook is not defined and so it potentially extends to all forms of credit support.
We are frequently seeing fund groups which contain certain entities that are not fully grouped with an Irish regulated fund or sub-fund. For example, the structure could contain an orphaned Irish special purpose vehicle (“SPV”) that is usually financed by way of debt instruments (such as notes). These are issued by the SPV to a regulated fund. In this scenario, the SPV, by its nature, is not a 100% owned subsidiary of the fund which holds the issued notes.
In circumstances where the SPV has separate financing arrangements with a third party lender, particular consideration needs to be given as how best to (i) finance such SPV and (ii) obtain credit support in respect of the SPV’s obligations to a lender.
In these circumstances, as the SPV is not a 100% owned subsidiary of the regulated fund, it is not possible for the fund to provide a guarantee to a third party lender in respect of the SPV’s obligations. In addition, other forms of credit support would need to be carefully considered and may fall foul of the prohibition on providing guarantees to third parties.
However, a “cascading pledge” structure is one structure often used to navigate the regulatory complications, through the use of a series of security assignments to indirectly assign the fund interests to a lender.
In this structure, the fund pledges the capital commitments of the investors in the fund to the SPV, in order to secure its obligations to the SPV under the notes. The SPV, in turn, assigns:
- its rights under the security from the fund; and
- the call right under the notes issued to the fund,
to a lender (to secure its obligations as a borrower under its underlying facility).
This cascading security structure facilitates the lender in an enforcement scenario to step into the shoes of (a) the fund and call capital from those investors and (b) the SPV and make a call under the notes.
We are also regularly seeing the above cascading security used in a variety of fund finance structures that contain, for example, upper-tier feeder funds and lower-tier master funds (these typically can include Delaware and Cayman LPs in addition to Luxembourg funds, Irish funds and Irish SPVs).