EU Legislative Measures for Non-Performing Loans – Impact on Luxembourg Loan Participating Funds

Abstract

On the 14th of March 2018, the European Commission released an EU legislative package that aims to address the issue of non-performing loans (“NPLs”) held by European banks. The European Commission’s package of measures contains two legislative proposals, being: (i) a proposal for a Directive on Credit Servicers, Credit Purchasers and the Recovery of Collateral (the “NPL Directive”); and (ii) a proposal for a Regulation amending the Capital Requirements Regulation. This contribution covers the NPL Directive that seeks to address the issue of piling up NPLs held by credit institutions. For that purpose, the NPL Directive seeks to introduce two viable solutions. First, it seeks to introduce an EU legal framework for credit servicers to whom banks can outsource the servicing of these loans. Currently, Member States regulate credit servicing activities to varying degrees leading to a fragmented European market for credit servicers. Consequently, credit servicers do not have the possibilities of scaling up on the European level. Second, the NPL Directive seeks to remove impediments to the transfer of non-performing and performing loans by introducing an EU legal framework for credit purchasers that removes the legal impediments for the transfer of these loans to non-bank credit purchasers. Currently, the fragmented legal framework in Europe disincentives credit purchasers to participate on the secondary market for (non-)performing loans issued by EU credit institutions. The NPL Directive covers any person buying, or being involved in managing and monitoring loans issued by EU credit institutions. The current proposed legal framework under the NPL Directive for credit servicers and credit purchasers would cover any fund or fund manager when investing in loans issued by EU credit institutions and any manager or adviser assisting in managing and monitoring such EU loans.

This contribution discusses the legal framework proposed for credit servicers and credit purchasers under the NPL Directive and its impact on Luxembourg loan participating funds, i.e. Luxembourg AIFs purchasing/acquiring all or parts of an existing loan or package of loans (whether fully drawn or not) on the secondary market from a third party after its origination. For that purpose, first this contribution discusses the scope of the proposed NPL Directive. This article then clarifies the proposed EU legal framework for credit servicers and credit purchasers. It continues by discussing the possible impact of the NPL Directive on Luxembourg loan participating funds and then concludes.

Keywords: AIFs, NPLs, credit servicers, credit purchasers, loan participating funds