Corporate debt funds eyed to prevent financial crunch amid COVID-19 crisis

SEC chair Emilio Aquino | Inquirer.net

The Securities and Exchange Commission seeks to help prevent the coronavirus (COVID-19) pandemic from spawning local financial crunch by soon allowing the creation of new investment vehicles called corporate debt funds (CDFs) that will primarily invest in corporate debt papers of large and medium enterprises.

“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 chair Emilio Aquino said in a press statement on Thursday.

CDF 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,” Aquino added.

The SEC issued for public comment on July 8 the draft rules providing the minimum requirements and guidelines in the creation and operation of such investment companies.

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 corresponds to a distinct part of the assets and liabilities of the CDF.

Subscription to a CDF is done only through an initial public offering and redemption is upon 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.

This new investment vehicle will be exempted from the registration requirements prescribed under Section 8.1 of Republic Act No. 8799, or the Securities Regulation Code (SRC). However, such exemption must be confirmed or approved by the SEC and, for such purpose, the CDF must submit a simplified prospectus and a product highlight sheet.

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.

To incorporate, the CDF must have a minimum subscribed and paid up capital of P50 million. As an exception, the subscribed and paid-up capital must 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 prospectus must 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 must 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.

Investments in corporate debt issued by a single enterprise must not exceed 25 percent of the net asset value (NAV) of the CDF and 50 percent in the case of single group entities. The limit will 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 percent 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.