The Securities and Exchange Commission (SEC) said it is looking at a new rule to cover close-end mutual funds that invest in debt papers of large and medium enterprises called corporate debt funds (CDF), providing requirements and guidelines in their creation and operation.
“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 (new coronavirus disease 2019) pandemic, and support the recovery of businesses and the overall economy therefrom,” said Emilio Aquino, SEC chairman.
“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,” he added
The SEC said to incorporate a corporate debt fund, the company should 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 SEC said.
It shall also 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.
“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 SEC said.
The SEC also said 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 SEC said.
The CDF is required to 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,” the SEC said.
“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 SEC added.
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 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,” the SEC said.
A CDF has to submit 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 SEC said.
