Standard exchange traded fund relief granted from certain requirements in National Instrument 81-102 Mutual Funds to a structured product listed on the Toronto Stock Exchange not offered on a continuous basis. Relief also granted from certain of restrictions in National Instrument 81-102 Mutual Funds on securities lending transactions, including relief to exceed the 50% aggregate lending limit on a static common share portfolio.
National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.4(2) and (3), 2.5(2)(a) and (c), 2.6(a)(ii), 2.3(g), 2.7(1)(a), 2.7(4), 2.12(1)1, 2 and 12, 2.12(3), 2.15, 2.16, 3.3, 10.3, 10.4, 12.1, 14.1, 19.1.
June 29, 2005
McMillan Binch Mendelsohn LLP
Attention: Kimberly J. Poster
Global Credit Pref Corp. (the "Company")
Application dated May 30, 2005 filed pursuant to section 19.1 of National Instrument 81-102 ("NI 81-102")
Application No. #391/05 and Sedar Project No. 791030
By letters dated May 30, 2005 and June 6, 2005 (collectively, the "Application"), you applied on behalf of the Company to the local securities regulatory authority or regulator (collectively the "Decision Makers") in each province of Canada except Québec for exemptive relief from certain provisions of NI 81-102 pursuant to section 19.1 of NI 81-102. Ontario is the principal jurisdiction of the Company.
From our review of the Application and the amended preliminary prospectus dated May 30, 2005 filed on behalf of the Company under Sedar Project No. 782387 (the "Preliminary Prospectus"), we understand the relevant facts and representations to be as follows:
1. The Company is a mutual fund corporation established under the laws of Ontario.
2. Gatehouse Capital Inc. (the "Manager") is the promoter and manager of the Company and will provide or arrange for the provision of administrative services required by the Company.
3. First Asset Investment Management Inc. (the "Investment Advisor") is the investment advisor to the Company. The Investment Advisor is registered as an advisor in the categories of investment counsel and portfolio manager, and is registered as a commodity trading counsel and commodity trading manager.
4. The Company will make an offering (the "Offering") to the public, on a best efforts basis, of preferred shares (the "Preferred Shares") pursuant to a final prospectus that will be filed with the securities regulatory authorities in each of the Provinces of Canada.
5. The Preferred Shares are expected to be listed and posted for trading on the Toronto Stock Exchange (the "TSX"). An application requesting conditional listing approval has been made by the Company to the TSX.
6. The Preferred Shares have been assigned a preliminary rating of P-l (Low) by Standard & Poor's, a division of The McGraw Hill Companies, Inc. ("S&P"), in accordance with the rating criteria applicable to Canadian special purpose entities.
7. The Company's investment objectives are: (i) to pay holders of Preferred Shares ("Holders") on a date that is approximately ten years from the closing date of the Offering (the "Redemption Date") an amount per Preferred Share equal to the original subscription price of $25.00 per Preferred Share; and (ii) to provide Holders with quarterly fixed cumulative preferential distributions.
8. The Company will invest the net proceeds of the Offering in order to obtain exposure to a credit linked note (the "Credit Linked Note"), which will be rated A- by S&P at closing of the Offering. The Credit Linked Note will be issued by The Toronto- Dominion Bank ("TD Bank"), whose long term debt is rated A+ by S&P as of the date hereof. The return on the Credit Linked Note will be linked to the number of defaults experienced over the term of the note among the issuers in an equally weighted portfolio (the "CLN Portfolio") of approximately 129 companies, all of which are currently rated investment grade by S&P.
9. In order to provide the Company with the means to meet its investment objectives, the Company will enter into a forward purchase and sale agreement (the "Forward Agreement") with TD Global Finance (the "Counterparty"), which will provide the Company with the economic return generated by the Credit Linked Note. The Credit Linked Note will be held by a newly created investment trust to be established under the laws of Ontario, Global Credit Trust. Under the terms of the Forward Agreement, the Counterparty will agree to pay to the Company, on or about the Redemption Date, as the purchase price for a portfolio of common shares of Canadian public companies (the "Common Share Portfolio") to be acquired by the Company with the net proceeds of the Offering, the economic return provided by the Credit Linked Note. The obligations of the Counterparty will be guaranteed by TD Bank.
10. The Company proposes to engage in securities lending transactions with respect to the securities in the Common Share Portfolio in order to earn additional returns which it expects will defray some of its ongoing operating costs. The Company expects that such loans will represent greater than 50% of the total assets of the Company. The Company may lend securities to one or more borrowers directly, or may lend securities indirectly through an agent, which agent may not be the Company's custodian but would be a Canadian financial institution or the investment bank affiliate of a Canadian financial institution.
11. The Company shall ensure that any agent through which the Company lends securities has established, and shall maintain, appropriate internal controls, procedures and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.
12. If the Company lends securities to borrowers directly, each of the Company and the Manager shall, in administering such securities lending transactions, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances, and shall ensure that the borrower has established, and shall maintain, appropriate internal controls, procedures and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.
13. The securities in the Common Share Portfolio will be pledged to the Counterparty as collateral for the obligations of the Company under the Forward Agreement. The Counterparty must release its security interest in the securities in the Common Share Portfolio in order to allow the Company to lend such securities, provided that the Company grants to the Counterparty a security interest in the collateral held by the Company for the loaned securities.
14. The Common Share Portfolio is a static portfolio that will not be actively managed except in limited circumstances. It would not be practical for the Company's custodian to act as an agent with respect to securities lending transactions since at no time will the custodian have possession of, or control over, the securities in question.
15. The Preliminary Prospectus contains, and the final prospectus will contain, disclosure with respect to securities lending by the Company. Other than with respect to the exemptions granted hereunder, any securities lending transactions will be conducted in accordance with the provisions of NI 81-102.
16. The net asset value per Preferred Share will be calculated twice a month. The Manager will post the net asset value per Preferred Share on its website at www.gatehousecapital.ca.
17. The description of the retraction process contained in the Preliminary Prospectus contemplates that the retraction price for the Preferred Shares will be determined as of the valuation date, being the last day of the month (the "Retraction Date"). As requests for retractions may be made at any time during the month and are subject to a cut-off date (five business days prior to the Retraction Date), and as the net asset value is calculated twice a month, retractions may not be implemented at a price equal to the net asset value next determined after receipt of the retraction request.
18. On a retraction, Holders will be entitled to receive a retraction price per Preferred Share equal to 95% of the net asset value determined at the relevant Retraction Date less $0.75. Holders of Preferred Shares that have retracted their shares will receive payment on or before the tenth business day following the relevant Retraction Date.
19. The Company will make fixed quarterly distributions to Holders of the Preferred Shares. The record date for Holders entitled to receive such distributions will be determined in accordance with the requirements of the TSX.
This letter confirms that, based on the information provided in the Application and the disclosure in the Preliminary Prospectus (including the facts and representations described above), and for the purposes described in the Application, the Decision Makers hereby grant exemptions from the following requirements of NI 81-102:
(a) subsection 2.1(1) -- to permit the Company to enter into and maintain a position in the Forward Agreement for which the payment obligations of the Counterparty will be determined by reference to the performance of Global Credit Trust;
(b) subsections 2.4(2) and 2.4(3) -- to permit the Company's exposure under the Forward Agreement (and any replacement or assignment of that agreement) to exceed the limitations relating to investment in illiquid assets, provided that the mark-to-market exposure to the Counterparty under the Forward Agreement (and any replacement or assignment of that agreement), for a period of 60 days or more, shall not exceed 30 percent of the assets of the Company;
(c) subsections 2.5(2)(a) and 2.5(2)(c) -- to permit the Company to enter into and maintain a position in the Forward Agreement for which the payment obligations of the Counterparty will be determined by reference to the performance of Global Credit Trust, in order to provide the Company with exposure to the Credit Linked Note as described in the Preliminary Prospectus;
(d) subsection 2.6(a)(ii) -- to permit the Company to provide a security interest in its portfolio assets to the Counterparty in connection with the Forward Agreement, as disclosed in the Preliminary Prospectus, and any replacement or assignment of that agreement, in accordance with industry practice with respect to this type of transaction;
(e) subsections 2.3(g) and 2.7(1)(a) -- to permit the Company to enter into the Forward Agreement (and any replacement or assignment of that agreement) that has a remaining term to maturity of greater than five years on the condition that the Company does not and will not enter into any other specified derivative transaction that does not satisfy the requirement of section 2.7(1)(a);
(f) subsection 2.7(4) -- to exempt the Company from the prescribed exposure limit under the Forward Agreement (and any replacement or assignment of that agreement), provided that the mark-to-market exposure to the Counterparty under the Forward Agreement (and any replacement or assignment of that agreement) shall not exceed, for a period of 60 days or more, 30 percent of the net assets of the Company;
(g) subsection 2.12(1)1 -- to permit the Company to enter into securities lending transactions that are not administered and supervised in the manner required by sections 2.15 and 2.16;
(h) subsection 2.12(1)2 -- to permit the Company to enter into securities lending transactions made under written agreements that implement the provisions of section 2.12 other than subsections 2.12(1)1 , 2.12(1)12 and 2.12(3);
(i) subsection 2.12(1)12 -- to permit the Company to enter into securities lending transactions pursuant to which the aggregate market value of all securities loaned exceeds 50% of the total assets of the Company, provided that the Company, in connection with each such transaction, receives the collateral prescribed by subsections 2.12(1)3 to 2.12(1)6, has rights set forth in subsections 2.12(1)7, 2.12(1)8, 2.12(1)9 and 2.12(1)11, and complies with subsection 2.12(1)10;
(j) subsection 2.12(3) -- to permit the Company to provide a security interest to the Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 13;
(k) section 2.15 -- to permit the Company to lend securities either through an agent that is not the custodian of the Company or directly to a borrower, provided that:
(i) the Company enters into a written agreement with such agent or direct borrower that complies with each of the requirements set forth in subsection 2.15(4), except that references to compliance with NI 81-102 shall be as modified by the exemptions granted hereunder;
(ii) the Company, if lending to a direct borrower, or the agent administers the securities lending transactions in compliance with subsection 2.15(5); and
(iii) if the Company lends indirectly through an agent, the agent is a bank or trust company described in paragraph 1 or 2 of section 6.2 of NI 81-102 (an "Eligible Agent") or the investment bank affiliate of an Eligible Agent that is registered as an investment dealer;
(l) section 2.16 -- to permit the Company to enter into securities lending transactions with direct borrowers that are not in compliance with the provisions of section 2.16 as they apply to agents provided that the Manager, itself, meets these requirements as it if was the agent;
(m) section 3.3 -- so that the organizational costs and the expenses of the Offering can be borne by the Company;
(n) section 10.3 -- to permit the Company to calculate the retraction price of the Preferred Shares in the manner described in the Preliminary Prospectus and on the applicable Valuation Date, as defined in the Preliminary Prospectus, following the surrender of Preferred Shares for retraction;
(o) section 10.4 -- to permit the Company to pay the retraction price of the Preferred Shares on the Retraction Payment Date, as defined in the Preliminary Prospectus;
(p) section 12.1 -- to relieve the Company from the requirement to file the prescribed compliance report; and
(q) section 14.1 -- to relieve the Company from the requirement relating to the record date for payment of dividends or other distributions of the Company, provided that it complies with the applicable requirements of the TSX.