Our objective is to consider the treatment of secured cash borrowing (e.G. Mortgages) for AIFMD Annex IV reporting purposes.

This includes:

In our example scenario, we have a portfolio composed of a £15m property and a £12m loan, hence a NAV of £3m.

In Funds-Axis opinion,

THE AUM IS £27M

It is not specifically stated in the AIFMD Directive or in the Level 2 Regulation that cash and borrowings form part of the AUM.

However, that that is the case for cash and borrowings can be seen in the ESMA Q&A (see questions 46 and 63 below) and from Para 83 of ESMA, Final report Guidelines on reporting obligations under Articles 3(3)(d) and 24(1), (2) and (4) of the AIFMD.

Unlike for Gross Exposure and for Commitment Exposure, there are no provisions as regards how borrowing should be excluded or not double counted. There are no provisions referring to the calculation of exposure resulting from the reinvestment of cash borrowings for AUM.

Further, given the ESMA Guidelines and Q&A, it seems clear that the borrowing should appear in the Annex IV report for the various different disclosures – geographic exposure, main instruments etc.

THE GROSS EXPOSURE IS £15M

Whilst the mortgage doesn’t benefit from the provisions of Article 6.4 (exclude temporary borrowings), it does benefit from the provisions of Article 7(d) which provides that:

The mortgage also benefits from:

“ANNEX I Methods of increasing the exposure of an AIF
“2. Secured cash borrowings: Secured cash borrowings are similar to unsecured cash borrowings, but the loan may be secured by a pool of assets or a single asset. If the cash borrowings are not invested but remain in cash or cash equivalent as defined in Article 7(a) they will not increase the exposure of the AIF.”

THE COMMITMENT EXPOSURE IS £15M

Article 8 c) provides that you “calculate the exposure created through the reinvestment of borrowings where such reinvestment increases the exposure of the AIF as defined in paragraphs (1) and (2) of Annex I;”

Accordingly, the provision of Annex 1, Article 1 (see above) apply equally to Commitment Exposure. Accordingly, the same treatment applies as above for Gross Exposure.

The below are extracts from the AIFMD Level 2 Regulation and also from ESMA’s Q&A on AIFMD:

Preamble

(12) [AIF should calculate gross and commitment exposure]

(13) When calculating the exposure, all positions of the AIF should initially be included, including short and long assets and liabilities, borrowings, derivative instruments and any other method increasing the exposure where the risks and rewards of assets or liabilities are with the AIF, and all other positions that make up the net asset value.

(14) Borrowing arrangements entered into by the AIF should be excluded if they are temporary in nature and relate to and are fully covered by capital commitments from investors. Revolving credit facilities should not be considered being temporary in nature.

Article 3: Calculations of assets under management

3. For the purpose of calculating the total value of assets under management, each derivative instrument position, including any derivative embedded in transferable securities shall be converted into its equivalent position in the underlying assets of that derivative using the conversion methodologies set out in Article 10. The absolute value of that equivalent position shall then be used for the calculation of the total value of assets under management.

Article 6 General provisions on the calculation of leverage

4. AIFMs shall exclude borrowing arrangements entered into if these are temporary in nature and are fully covered by contractual capital commitments from investors in the AIF.

Article 7 Gross method for calculating the exposure of the AIF

The exposure of an AIF calculated in accordance with the gross method shall be the sum of the absolute values of all positions valued in accordance with Article 19 of Directive 2011/61/EU and all delegated acts adopted pursuant to it.

(c) exclude cash borrowings that remain in cash or cash equivalent as referred to in point (a) and where the amounts of that payable are known;

(d) include exposure resulting from the reinvestment of cash borrowings, expressed as the higher of the market value of the investment realised or the total amount of the cash borrowed as referred to in paragraphs (1) and (2) of Annex I;

Article 8 Commitment method for calculating the exposure of an AIF

c) calculate the exposure created through the reinvestment of borrowings where such reinvestment increases the exposure of the AIF as defined in paragraphs (1) and (2) of Annex I;

ANNEX I Methods of increasing the exposure of an AIF

1. Unsecured cash borrowings: When cash borrowings are invested they have the propensity to increase the exposure of the AIF by the total amount of those borrowings. Therefore, the minimum exposure is always the amount of the borrowing. It might be higher if the value of the investment realised with the borrowing is greater than the borrowed amount.

To avoid double counting, cash borrowings that are used to finance the exposure shall not be included within the calculation. If the cash borrowings are not invested but remain in cash or cash equivalent as defined in Article 7(a) they will not increase the exposure of the AIF.

2. Secured cash borrowings: Secured cash borrowings are similar to unsecured cash borrowings, but the loan may be secured by a pool of assets or a single asset. If the cash borrowings are not invested but remain in cash or cash equivalent as defined in Article 7(a) they will not increase the exposure of the AIF.

Article 10 Conversion methodologies for derivative instruments AIFMs shall use the conversion methodologies set out in Annex II for the derivative instruments referred to therein.

Para 83: