The Private Credit Boom

The private credit boom is a welcome development for corporate borrowers, given the lack of competition in the Irish bank lending market. Financial Services partners, Rowena Fitzgerald and Daragh O'Shea set out the key drivers influencing this boom. They also look at how increased regulatory focus may impact existing and new entrants to this growing sector.

Private Credit is experiencing a boom with the Financial Times saying there are few hotter fads in finance today than private credit. Jamie Dimon of JP Morgan Chase & Co has referred to private credit lenders “dancing in the streets”.

However, a boom in financial services activity inevitably leads to a corresponding increase in regulatory scrutiny. In this article, we look at:

1. The drivers of the private credit boom
2. How private credit is structured in Ireland, and
3. The increased regulatory focus on the private credit sector

The drivers of the private credit boom

Prevailing macro-economic conditions including higher interest rates and US bank turmoil in 2023 have increased the attractiveness of private credit. From a practical perspective, highly-leveraged companies can access private credit to fund their day-to-day operations as traditional banks shy away from commercial lending in a process commentators have called “de-banking”.

How is private credit structured in Ireland?

Private credit in Ireland is generally structured through one of the following vehicles[1]:

• L-QIAIFs
• A regulated investment fund structure, typically a loan-originating qualified investor alternative investment fund (the L-QIAIF), may be established to carry out loan origination subject to conditions and restrictions laid down by the Central Bank of Ireland (CBI).
• Securitisation vehicle

Alternatively, a special purpose vehicle (SPV), typically a designated activity company, which is an Irish limited liability corporate vehicle formed under (and subject to) the Irish Companies Act, can be established to carry out the loan origination activities.

The SPV usually elects to opt into the section 110 regime under the Irish tax legislation, which ensures that the SPV will be as tax efficient as possible. The SPV then obtains financing, usually in the form of profit participating loans or notes, which it then uses to fund its loan origination activities.[2] An SPV does not need to be “approved” by the CBI from a regulatory perspective. However, due to its section 110 status, it will need to ‘register’ with the CBI under its Special Purpose Entities regime and to carry out quarterly reporting. In addition, it may be subject to anti-money laundering and credit reporting requirements.

Increased regulatory focus

Risks associated with the private credit sector have been increasingly emphasised by regulators. For evidence of this, see the speech of the CBI’s Deputy Governor focusing on the sector entitled ‘Private Assets: A changing European landscape’. In this context, there is a particular concern about possible spillover risks from the private credit sector into the mainstream banks due to interlinkages between the two sectors. Last year, the CBI issued a discussion paper on macroprudential measures for investment funds, with a view to advancing “the discussion on how a comprehensive macroprudential perspective in the regulation of the funds sector could be achieved”.

This is not necessarily negative in and of itself and could simply be regarded as a consequence of the strength and growth of the funds sector generally, and private credit sector specifically. However, as regulatory creep is not something that is generally welcomed by market participants, it is definitely something to be kept under review.

Is it all regulatory bad news?

Despite increased regulatory scrutiny of the private credit sector, there may be positive news on the regulatory horizon for Irish L-QIAIFs. To date, Ireland’s loan-origination regime applicable to L-QIAIFs has been considered somewhat restrictive. However, AIFMD2, which has recently been agreed at European level, will introduce a somewhat lighter European-wide loan origination regime for regulated funds, specifically alternative investment funds (AIFs).

In a welcome development, indications are that the existing Irish loan-origination regime for AIFs, which does not apply to SPVs, which are not subject to AIFMD, may be lightened to align with the new AIFMD2 standards. The CBI has stated that it “will move to align the provisions of our domestic framework with that of AIFMD 2”. The Department of Finance has also indicated a focus on this area in its Funds Sector 2030: Progress Update confirming potential updates to the domestic regime as part of the broader transposition of AIFMD2.

Comment

The private credit boom is clearly a welcome development for corporate borrowers, in particular, given the lack of competition in the Irish bank lending market. While increased regulatory activity may not be welcomed by many non-bank lenders, it is somewhat inevitable given the significant growth of the sector and careful regulatory and structuring advice for existing and new entrants to this growing sector is a non-negotiable requirement.

If you are interested in this topic and potential options for structuring private credit in Ireland, please reach out to our Investment Funds or Debt Capital Markets teams who have extensive experience in this area.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1] Source: Central Bank of Ireland ‘Beyond “Big”: Measuring Ireland’s Non-Bank Financial Intermediation Sector’ here

[2] Further detail on SPV activities are available here.