Central Bank Announces Its Macroprudential Policy Framework For Irish Property Funds

Published date30 November 2022
Subject MatterFinance and Banking, Financial Services
Law FirmWalkers
AuthorMr Damien Barnaville, Nicholas Blake-Knox, Eimear Keane, Aongus McCarthy, Ian McNamee, Rachel Rodgers, Andrew Traynor and Joe Mitchell

As outlined in our previous advisory 'Central Bank's property fund proposals', the Central Bank of Ireland (the "Central Bank") has recently been consulting on two key proposals:

  • (i) a proposal to introduce leverage limits on funds domiciled in Ireland, authorised under domestic legislation, and investing over 50% of their portfolio in directly or indirectly held Irish property assets ("Property Funds") and
  • (ii) proposed guidance relating to liquidity mismatches in Property Funds.

On 24 November 2022, the Central Bank published its (i) Feedback Statement in response to consultation paper 145 ("CP145") (the "Feedback Statement"), and (ii) Macroprudential Policy Framework for Irish Property Funds containing its final guidance on redemption terms for Property Funds (the "Guidance").Introduction of 60% Leverage Limit

To address perceived risks stemming from leverage in Property Funds, a 60% leverage limit (total debt to total assets) (the "Leverage Limit") is being introduced by the Central Bank with a five-year implementation period for existing Property Funds. The Leverage Limit includes all sources of debt including shareholder loans. The Central Bank expects that existing Property Funds will make gradual and orderly progress towards lower leverage levels over the implementation period. The Central Bank also acknowledges that its approach to enforcement of the Leverage Limit will be cognisant of the fact that forced asset sales run contrary to the underlying objective of the limit itself.

Those Property Funds which have leverage close to or above the Leverage Limit will be required to submit plans to the Central Bank on how they will deleverage or maintain leverage below 60% throughout the implementation period in a gradual and orderly manner. During this implementation period, the Central Bank has noted that it does not expect Property Funds with leverage above the Leverage Limit to increase the quantum of their debt. The implementation of the Leverage Limit will be assessed annually by means of a tailored regulatory return, in a format to be finalised in the first half of 2023 and filed with the Central Bank. The Central Bank will be actively monitoring and following up to ensure appropriate progress is being made throughout the implementation period and expects that deleveraging should be significantly progressed by the end of year three.

ESMA has also issued its accompanying formal advice to the Central Bank on the Leverage Limit measures pursuant...

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