Hedge Funds Lend to Companies based in Ireland
July 28, 2014, New York, NY
By: Kim Wales
The central bank has drawn up new rules for Ireland, one of the biggest hubs for funds in Europe to allow hedge funds based in the country to lend to companies. The regulations the central bank has drawn will allow specialized loan funds that it authorizes to extend loans internationally.
Lending to households and corporations have been sluggish since the 2008 financial crisis by European banks whom see to continue to increase the requirements to qualify. Firms who are too small to issue bonds are increasingly seeking to borrow from other sources such as insurers, private equity firms and hedge funds.
Traditionally, Ireland prevented hedge funds domiciled in the country from lending because regulators viewed it as too risky. However, access to credit a growing problem in Europe and across the globe.
Under the rules, a loan fund will not be able to lend more than a quarter of its assets to one borrower and the amount of debt the fund can take on will be capped at a ratio of 1 to 1, meaning that if a fund has assets of 100 million euros it can borrow another 100 million euros.
The central bank issued a consultation paper on the rules on Monday and expects them to be in place by the end of the year.
“In our view this is a sector that should be subject to some additional regulation,” said Martin Moloney, head of markets policy at the Irish central bank.
“If you have loan origination funds operating out of Ireland and lending into other countries there are potential cross border issues. We wanted to deal with that upfront and we have been very focused on the financial stability issues.
The move by the Irish central bank comes as the European Central Bank and the Bank of England are trying to resurrect the European Union’s market for asset-backed securities as a way of getting credit flowing to smaller businesses and plug some of the gap left by banks.