The Securities and Exchange Commission (SEC) is working on a new regulatory framework for the development of a capital market where closed-end investment companies primarily invest in corporate debt papers of large and medium enterprises, as part of efforts to cushion the economic fallout of the COVID-19 pandemic.
The Commission on July 8 issued for public comment the draft rules providing the minimum requirements and guidelines in the creation and operation of such investment companies called Corporate Debt Funds (CDFs).
“With the proposed regulatory framework, we hope to help avert credit and liquidity crises that may arise from the economic downturn caused by the COVID-19 pandemic, and support the recovery of businesses and the overall economy therefrom,” SEC Chairperson Emilio B. Aquino said.
“The new investment vehicle called Corporate Debt Fund will be particularly helpful in providing for the liquidity needs of large- and medium-sized corporations for repayments, emergency spending and investments necessary to sustain their operations and preserve jobs in these challenging times.”
A CDF is a closed-end investment company that offers for sale a fixed number of non-redeemable units of participation or shares and has a limited offer period. Its objective is to invest in the portfolios of corporate debt papers of large corporations and medium-sized enterprises operating or deriving income in the Philippines, or any company guaranteed by a large or medium-sized domestic corporations or by the Philippine government and/or its agencies.
The CDF may offer different share or unit classes with similar investment objectives but are managed as separate asset pools. Each class shall correspond to a distinct part of the assets and liabilities of the CDF.
Subscription in a CDF is done only on initial public offering and redemption is at maturity although it can make periodic distribution of income to investors on a pro-rata basis. It may also pay out the proceeds of the underlying investments of each share/ unit class upon their liquidation until the termination and maturity of its securities.
To incorporate, the CDF shall have a minimum subscribed and paid up capital of P50 million. But as an exception, the subscribed and paid up capital shall not be lower than P1 million, if the CDF forms part of a group of investment companies to be created or already in existence to be managed or under management by the same fund manager with a track record of at least five years.
The CDF shall be exempt from the registration requirements prescribed under Section 8.1 of Republic Act No. 8799, or The Securities Regulation Code. However, such exemption must be confirmed or approved by the SEC and, for such purpose, the CDF shall submit a simplified prospectus and a product highlight sheet.
Moreover, the conduct by any person in the purchase, sale, distribution of CDF securities, settlement and other activities shall comply with the provisions of The Securities Regulation Code and applicable rules. The approval or confirmation by the Commission of the CDF shares or units as an exempt transaction shall likewise be subject to a payment of a fee.
The prospectus shall include the investment objective, strategy and limitations of the CDF, the investment powers of the fund manager; the valuation methodology used, the key risks and risk management processes of the CDF, the liability of the CDF and fund manager, and the rights and protections afforded to investors, among others.
The CDF may issue its shares or units in tranches. It shall issue the first tranche within six months from the approval of its simplified prospectus and product highlight sheet, and the subsequent tranches within three months from the filing of a current report outlining the material changes in its prospectus and the updated prospectus.
The CDF may offer the securities to qualified buyers such as banks, pension funds, insurance companies and registered investment houses under private placements, or to not more than 19 non-qualified buyers in the Philippines during a 12-month period.
The CDF shall invest the proceeds from the issuance of securities in corporate debts such as bonds and promissory notes of large corporations and medium-sized enterprises. However, it may also invest in deposits and money market instruments pending the deployment of the proceeds in accordance with its investment objectives.
Investments in corporate debt issued by a single enterprise must not exceed 25% of the net asset value (NAV) of the CDF and 50% in the case of single group entities.
The limit shall be computed based on the total proceeds of the securities sold within the initial offering period.
The single issuer limit may be raised to 30% if the corporate debts are assessed by any domestic or global rating agency to have the best quality and highest safety for timely payment of interest and principal. It may also be waived if the CDF securities have a capital protection feature.
The reportorial requirements of the CDF shall include a monthly report showing its net assets, details of corporate debts acquired for the month, and the outstanding balance of the investments held in the portfolio.
In its annual audited financial statements and interim financial statements, the CDF shall likewise present a combined statement of net assets and a detailed breakdown of the financial statement for each class of share/ unit.
The draft Rules on Corporate Debt Funds, prepared in consultation with the mutual fund industry through Philippine Investment Fund Association (PIFA), are available on the SEC website.
All interested parties may submit their comments on the draft rules not later than July 17 to the SEC Corporate Governance and Finance Department located on the Ground Floor, Secretariat Building, PICC Complex, Pasay City. Comments may likewise be emailed at [email protected] and [email protected].