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Introduction

Project financing has historically been a popular investment scheme and source of capital in Norway for shipping projects. However, the Norwegian regulatory authorities have recently published guidelines regarding the application of the alternative investment fund (AIF) regime to project finance entities. Issuers, advisers, arrangers and investors in shipping projects must be aware of the pitfalls of being captured by the wide definition of 'AIF' and the steps that they can take in order to adapt to the regulations.

Definition of AIF

An AIF is defined as a collective investment undertaking which raises capital from a number of investors with a view to investing that capital for the benefit of those investors in accordance with a defined investment policy.

This definition is deliberately broad and is derived from the EU Alternative Investment Fund Managers Directive (AIFMD) (2011/61/EU).(1) The AIFMD was introduced into Norwegian law through the Norwegian Alternative Investment Fund Managers (AIFM) Act 2014. The broad definition of AIF captures a vast array of different investment schemes and could be interpreted as capturing shipping project finance, investor syndicates and certain single asset companies, all of which were previously unregulated and typically placed with relatively limited documentation for investors under the private placement regime.

If caught by the AIFM Act, issuers must appoint an internal or external manager who will be responsible for the portfolio and risk management of the AIF. If the issuer exceeds certain thresholds (€500 million for unleveraged, closed-ended funds and €100 million for leveraged funds) or is marketed towards retail investors, the appointed manager must hold a regulatory licence from the Norwegian Financial Supervisory Authority (FSA) and the fund must be approved for marketing in Norway by the FSA. In such a case, the manager will be subject to several burdensome requirements. For non-Norwegian undertakings, located either in the European Union or outside, the AIFM Act sets out detailed conditions and rules for the marketing of such funds to Norwegian investors. For Norwegian sub-threshold AIFs (ie, AIFs which do not exceed the aforementioned thresholds of €500 million or €100 million) which are marketed only to professional investors domiciled in Norway, a lighter-touch regime applies.

AIFMD and project finance

For many shipping project finance investment schemes, being captured by the full requirements of the AIFM Act is an unattractive proposition due to compliance costs, time to market and investor preference. But while registration and managing a sub-threshold AIF is manageable for most arrangers, it will limit the pool of eligible investors for the project and could therefore make raising the requisite capital more challenging. Therefore, it is important to clarify the regulatory status of any proposed investment scheme as early as possible in the process of raising capital for such projects.

That said, it is not always straightforward to determine whether a specific project falls within or outside the scope of the AIFM Act. In order to assist market participants, the European Securities and Markets Association (ESMA) has issued guidance on the definition of AIF. Notably, the ESMA guidance excludes undertakings which have a general commercial or industrial purpose, as opposed to a general financial purpose. Further, ESMA excludes undertakings where the investors have day-to-day discretion or control, as opposed to undertakings where all operational matters are left with a manager. The broad definition of AIF – when read in combination with the relatively unclear exclusions from the scope set out by ESMA – has left project finance arrangers and investors highly uncertain regarding the application of the AIFM Act. Perhaps because of this uncertainty, in the five years since the AIFM Act entered into force, most arrangers in both the shipping project finance and the larger real estate project finance markets have chosen to define their projects as non-AIFs.

New FSA guidelines

In June 2019 the FSA published new guidance on the application of the AIFM Act for project finance undertakings. The backdrop for the specific FSA guidance was partly the uncertainty in the Norwegian market concerning project finance, but also that certain unregulated arrangers had launched real estate investment schemes which attracted attention in the local financial press due to an exorbitant level of fees, negative returns and extensive conflicts of interests. However, the FSA guidance is more generally directed at all forms of single asset-company, investor syndicates and similar structures (ie, project finance), whether arranged by investment firms or others, and clearly states that such schemes will often be captured by the AIFM Act's definition of AIF. The FSA guidance generally follows the ESMA guidance and clarifies to some extent the concepts of 'general commercial or industrial purpose' and 'day-to-day discretion or control' in the context of project finance undertakings.

The FSA guidance also sets out certain important parameters that may be used when determining whether a specific project falls within or outside the AIFM Act. These are:

  • the quantity and quality of the investors;
  • the degree of commercial versus financial purpose of the project (asset play versus no defined exit strategy);
  • the degree of investor control and participation in the management of the undertaking; and
  • the degree of outsourced activities.

For example, a large bareboat project seeking investment from retail investors has a high probability of being caught by the definition of AIF, whereas a club deal with experienced shipping investors which are active participants in the shipping market will likely fall outside the definition. However, not all projects are so clear cut and all projects must therefore be assessed on a case-by-case basis in order to determine whether they fall within the definition of AIF, with the rationale for the assessments made being clearly documented. Depending on the outcome of the assessments, it will be important to ensure that any required disclaimers are made and that the transaction documentation is adapted as appropriate in line with the adopted assessment.

Following the FSA guidance, the choice for issuers and arrangers of shipping project finance deals is usually to:

  • choose between a club deal with a limited number of investors or otherwise structure the scheme in a way that excludes it from the definition of AIF; or
  • register the fund as an AIF and limit the marketing to professional investors.

Endnotes

(1) The key facts regarding the AIFMD can be summarised as follows:

Formalities

The AIFMD, including delegated regulations, as implemented in Norway through the AIFM (2014/28).

What is it?

A directive to regulate the managers of AIFs (eg, portfolio and risk management, depositary functions, valuation, reporting to the authorities, investor information, remuneration and marketing within the European Union and the European Economic Area).

To whom does it apply?

AIF managers managing AIFs. There is a limited impact on AIF managers managing AIFs with an aggregated value of assets under management of €100 million (leverage included) or with an aggregated value of assets under management of €500 million (no leverage and a five-year lock-in) for the management and marketing of AIFs within the European Union and the European Economic Area.

What is its purpose?

The directive regulates all AIF managers due to the financial risks that they entail, in order to protect investors from investment fraud or losses and harmonise legislation for AIF managers.

Why is it relevant?

Project finance (typically with regard to real estate and shipping projects) has recently been scrutinised by the FSA. Consequently, arrangers, issuers and investors should carefully assess the regulatory status of any project before raising capital.