New guidance from the Central Bank of Ireland (Central Bank) signals a change to the rules on Irish regulated funds granting third party guarantees and security. But has Cascading Security in Irish Fund Finance deals gone the way of the Dodo?

The Central Bank’s AIF Rulebook provides that a Qualifying Investor Alternative Investment Fund (QIAIF) may not act as a guarantor in respect of a third party. For many years this has been broadly interpreted as prohibiting the giving of guarantees or security by an Irish QIAIF in respect of the obligations of any party other than itself or a wholly owned/controlled subsidiary/limited partnership.

On subscription finance deals involving a master/feeder structure this has meant that, where the Irish QIAIF is a feeder fund rather than the borrower, the Irish QIAIF cannot give security directly to the lender but must instead grant security to the borrower (or the intermediate fund into which it invests) to secure its obligations to the borrower (most commonly its obligations to fund uncalled capital to the borrower under subscription documents), with the borrower then assigning (i.e. cascading) its interests under that security in favour of the lender. While cascading security is a tried and tested solution it does involve more documents and introduces complexity to deals, particularly where there are multiple layers of funds between the Irish QIAIF feeder fund and the borrower in a master/feeder structure.

The interpretation of the rule can also affect NAV and asset level financings. For example, in property financing deals (which often involve an Irish QIAIF) it is common for security to be granted over the property but also by the Irish QIAIF over its shares/LP interests in the borrower vehicle which is holding the property. Where more than one Irish QIAIF holds the shares/LP interest in that property holding vehicle the interpretation of the rule to date has restricted the ability of an Irish QIAIF to give security over its share/LP interests directly to the lender.

On 7 March 2025, the Central Bank published the 50th edition of its AIFMD Questions and Answers (Q&A), which provides important clarifications on the application of the prohibition on Irish QIAIFs acting as guarantors for third parties under the Central Bank’s AIF Rulebook.

In the Q&A the Central Bank has clarified that the AIF Rulebook does not prevent a QIAIF from providing a guarantee in respect of investments and/or intermediate vehicles for such investments in which the QIAIF has a direct or indirect economic interest, provided that:

1. Such arrangements are determined by the AIFM to be in the best interests of both the Irish QIAIF and its investors and are ancillary to the Irish QIAIF’s predominant investment strategy.
2. The AIFM (or in the case of a non-Irish AIFM or registered AIFM, the authorised Irish QIAIF) and the Irish QIAIF’s depositary confirm that the proposed transaction is on arm’s length and in the best interest of investors.
3. The prospectus discloses to investors that the Irish QIAIF can provide a guarantee in respect of investments and/or intermediate vehicles for such investments in which the Irish QIAIF has a direct or indirect economic interest, along with any associated material risks.
4. The liability of investors in the Irish QIAIF under such arrangements (above the value of their current holdings of shares or other interests in the QIAIF) shall be limited to the amount, if any, unpaid on the shares or other interests held by them which shall include, in the case of an Irish QIAIF that raises capital on a formally agreed capital commitment basis, the amount of the undrawn capital commitments in accordance with the prospectus and the constitutional document of the Irish QIAIF.
5. The Irish QIAIF complies with provisions of QA ID 1159 of the Q&A.
6. The AIFM must comply with applicable relevant requirements of AIFMD regarding leverage and risk management, including regularly conducting stress tests in accordance with Article 48 and other applicable requirements of AIFMD.

Conclusion

We welcome these helpful clarifications and understand that the Central Bank has issued the guidance on an interim basis pending a proposed consultation this year on a wider review of the AIF Rulebook. As detailed above there are a number of decisions that will need to be made by the Irish QIAIF, the AIFM and the depositary to facilitate the giving of such guarantees and security. The fund documents will also need to be carefully reviewed to ensure that they meet the above requirements. Where there is any doubt, or if time is of the essence, cascading security will remain an essential tool to have in the fund finance toolbox.

The Arthur Cox team has extensive experience advising lenders and managers on fund finance transactions. Please do reach out if you would like to discuss the implications of the Central Bank’s guidance on your financing transactions.