Securities Law & Instruments

Headnote

 

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief to remove Exemption Expiry Date from Prior Decision to permit a senior loan fund to continue to borrow cash up to an amount equal to 10% of NAV as a temporary measure to accommodate requests for the redemption of units of the fund – relief needed due to longer settlement times of senior loans – relief subject to numerous conditions – National Instrument 81-102 Investment Funds.

 

Applicable Legislative Provisions

 

National Instrument 81-102 Investment Funds, ss. 2.6(a)(i), 19.1.

 

December 7, 2017

 

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

 

AND

 

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS

IN MULTIPLE JURISDICTIONS

 

AND

 

IN THE MATTER OF

INVESCO CANADA LTD.

(the Filer)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) varying the decision issued to the Filer on June 17, 2016 (the “Prior Decision”). The Prior Decision is attached as Schedule “A”. The variation requested is to remove the Exemption Expiry Date (as defined herein) from the Prior Decision (the “Exemption Sought”).

 

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

 

(a)           the Ontario Securities Commission is the principal regulator for this application, and

 

(b)           the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.

 

Representations

 

The decision is based on the facts set out under “Representations” in the Prior Decision and the following facts represented by the Filer:

 

1.             The Prior Decision provides exemptive relief from subparagraph 2.6(a)(i) of National Instrument 81-102 to permit the Invesco Floating Rate Income Fund (formerly, the Trimark Floating Rate Income Fund) (the “Fund”) to borrow cash in an amount that does not exceed 10% of its net asset value, as a temporary measure to accommodate requests for redemptions of units of the Fund. The Prior Decision expires December 17, 2017, 18 months after the date of the Prior Decision (the “Exemption Expiry Date”).

 

2.             The Filer wishes to amend the Prior Decision by removing the Exemption Expiry Date from the Prior Decision.

 

3.             The Fund continues to be faced with the possibility of redemption of units at any time which the Filer must settle in accordance with the standard settlement time for a unitholder redemption, and there remains a concern that the Fund will, on a short-term basis, notwithstanding any cash and other liquid investments it holds, be required to borrow an amount which exceeds the five percent threshold stipulated by Section 2.6(a) of National Instrument 81-102 beyond the Exemption Expiry Date and into the foreseeable future.

 

4.             All other conditions under the Prior Decision continue to apply to the Exemption Sought.

 

Decision

 

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

 

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted.

 

“Vera Nunes”

Manager

Investment Funds and Structured Products

Ontario Securities Commission

 


Schedule “A”

 

June 17, 2016

 

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

 

AND

 

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS

IN MULTIPLE JURISDICTIONS

 

AND

 

IN THE MATTER OF

INVESCO CANADA LTD.

(the Filer)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for an exemption, pursuant to Section 19.1 of National Instrument 81-102 Investment Funds (“NI 81-102”), from subparagraph 2.6(a)(i) of NI 81-102 to permit Trimark Floating Rate Income Fund (the “Fund”) to borrow cash in an amount that does not exceed 10% of its net asset value, as a temporary measure to accommodate requests for redemptions of units of the Fund (the “Exemption Sought”).

 

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

 

(a)           the Ontario Securities Commission is the principal regulator for this application, and

 

(b)           the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.

 

Interpretation

 

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.

 

The following terms shall also have the following meanings:

 

Designated Counterparty means a person or company, or the direct or indirect parent company of such person or company, whose securities have a "designated rating" as defined in National Instrument 44-101 – Short Form Prospectus Distributions.

 

Drawdown Period means any period of time during which the Fund has outstanding borrowings greater than 5% of the Fund’s net asset value.

 

Unitholder means a beneficial and registered holder of a Unit.

 

Units means the units of the Fund, and Unit means one of them.

 

Representations

 

The decision is based on the following facts represented by the Filer:

 

1.             The Filer, a corporation incorporated under the laws of the province of Ontario, which has its head office in Toronto, is the manager, trustee and portfolio manager of the Fund.

 

2.             The Filer is not in default of any securities legislation in any of the jurisdictions in Canada.

 

3.             The Fund is: (a) an open-ended mutual fund trust established under the laws of the province of Ontario whose securities are offered for sale to the general public under a simplified prospectus filed in every jurisdiction in Canada (the Prospectus); (b) a reporting issuer in every jurisdiction of Canada; and (c) not in default of any securities legislation in any jurisdiction in Canada.

 

4.             The Fund is subject to and complies with NI 81-102, subject to any exemptions therefrom that have been, or may be, granted by the applicable securities regulatory authorities.

 

5.             The investment objective of the Fund is to seek to generate a high level of current income by investing primarily in floating rate debt instruments (also known as senior loans) of issuers located anywhere in the world.

 

6.             The Fund has disclosure in the Prospectus that the Fund invests primarily in floating rate debt instruments of issuers rated below investment grade, or if not rated, deemed to be below investment grade. Part A of the Prospectus describes Senior Loan Risk, which is included as a primary risk factor of the Fund. In the explanation of Senior Loan Risk, the Filer highlights that senior loans may have longer than normal settlement periods, and that such settlement periods exceed T+ 3.

 

7.             The Fund invests primarily in a portfolio of senior floating rate loans which are generally rated at or below BB+ by Standard & Poors, or Ba1 or less by Moody's Investor Services, Inc., or a similar rating by a designated rating organization (as defined in NI 44-101).

 

8.             The Filer has access to quotations with bid-ask spreads from the major broker-dealers active in the senior loan market, allowing the Filer to monitor and assess the liquidity of the portfolio assets and the market as a whole. The Filer actively monitors earnings reports, price movements and bid-ask spreads of the Fund's portfolio as part of its active management, and monitors compliance to the investment strategy in real-time. The Fund's portfolio of senior loans is actively monitored by the Filer, and the Filer processes all information available to it as part of its daily portfolio management activities.

 

9.             In addition to the ongoing monitoring of the markets and the Fund portfolio assets described above, each individual investment goes through a fundamental credit analysis (qualitative and quantitative), which includes an analysis of the possible downside of the investment, which may be referred to as stress tests, before the actual investment. These analyses will include, amongst other things:

 

(a)           revenue/EBITDA projections and sensitivity analysis including break-even point;

 

(b)           margin projections and sensitivity analysis;

 

(c)           impact of interest rates on cash flows;

 

(d)           free cash flow analysis; and

 

(e)           any other specific analysis appropriate for a particular sector and/or investment.

 

10.          Because they are secured against specific collateral of the borrower, senior loans offer a higher likelihood of recovery in the event of a borrower default compared to equivalently rated unsecured high yield bonds. In addition, senior loans have a higher priority claim relative to other debt instruments, increasing the chances of recovery in the event of bankruptcy or reorganization.

 

11.          The vast majority of sales of senior loans between the Fund and a Designated Counterparty will be subject to the standard terms and conditions for par / near par trade confirmations published by the Loan Syndications and Trading Association (the “Terms”), which Terms are binding on the parties to the transaction and do not contain any "outs" for force majeure or the stress or dislocation of the senior loan market (the foregoing does not apply in the rare case of a distressed loan).

 

12.          During any Drawdown Period, the purchaser that will be interacting with the Fund with respect to a senior loan will always be a dealer that is a Designated Counterparty.

 

13.          When selecting senior loans, the Filer uses a fundamental analysis to evaluate the investment opportunities of each issuer. When monitoring the risk associated with portfolio investments, the Filer considers whether the Fund is over or under represented in a specific industry sector. The Fund’s investments are typically held until maturity but may be sold if attractive opportunities arise.

 

14.          The Fund may invest in other financial instruments that may have economic characteristics similar to floating rate debt instruments. The Fund will typically seek to hedge its 80% or more non-Canadian dollar currency exposure to the Canadian dollar, but has the discretion to hedge less than 80%.

 

15.          Currently, approximately 10% of the Fund’s portfolio is comprised of cash and/or securities that will settle within three business days. The Filer plans to continue this practice for the medium term, but has the discretion not to do so.

 

16.          The net asset value per Unit of each class of the Fund is calculated and published daily in the financial press and on the Filer’s website at www.invesco.ca.

 

17.          The Fund may make monthly distributions of income, and if monthly distributions are made such distributions would be funded through the net assets of the Fund and not through borrowings.

 

18.          As trustee and manager, the Filer is entitled to receive a fixed annual management fee from each series of Units. Such annual management fees will be calculated as a fixed percentage of the net asset value of the applicable series of Units.

 

19.          The Filer believes that the senior loans that are or will be held by the Fund can be liquidated in an orderly fashion given the size and depth of the overall senior loan market. However, as the time it will take the Fund to settle a senior loan’s disposition is typically longer than that of equity securities, the Filer has determined that it is in the best interests of investors for the Fund to have the ability to use a temporary overdraft facility from time to time with a value of up to 10% of its net asset value to assist, if necessary, in meeting redemption requests.

 

Decision

 

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

 

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:

 

(a)           the Fund does not make a distribution to Unitholders where that distribution would impair the ability of the Fund to repay the funds borrowed under the overdraft facility;

 

(b)           the Fund’s next renewal prospectus or amendment to prospectus to be filed in connection with the continuous distribution of Units discloses the maximum percentage of assets of the Fund that the borrowing may represent, the Fund’s intended use of the amounts borrowed under the overdraft facility, the material terms of the overdraft facility and the risks arising from the borrowing under the overdraft facility; and

 

(c)           the Fund may only borrow cash in excess of 5% of net asset value if all of the following conditions are satisfied:

 

(i)            after giving effect to the borrowing, the outstanding amount of all borrowings of the Fund does not exceed 10% of the net asset value of the Fund;

 

(ii)           the Fund has entered into a fully binding agreement with a Designated Counterparty(s) to sell a senior loan(s) in order to satisfy redemption requests, but the settlement period on the senior loan(s) exceeds three days;

 

(iii)          the amount of cash that the Fund borrows does not exceed the amount of cash that it will receive in respect of the sale of the senior loan(s) referred to in paragraph (d)(ii) above; and

 

(iv)          the Fund has sold all of the securities in its portfolio, other than senior loans, and has used all of its available cash in order to satisfy redemption requests.

 

The Exemption Sought expires on a date that is 18 months after the date of this decision.

 

“Vera Nunes “

Manager

Investment Funds and Structured Products

Ontario Securities Commission