Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – investment fund manager obtaining relief from the requirement to obtain the approval of securityholders before changing the fundamental investment objective of non-redeemable investment funds – relief required as a result of changes to tax law eliminating certain tax benefits associated with character conversion transactions – manager required to send written notice at least 30 days before the effective date of the change to the investment objective of the funds setting out the change, the reasons for such change and a statement that the funds will no longer distribute gains under forward contracts that are treated as capital gains for tax purposes – National Instrument 81-102 Investment Funds.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 5.1(1)(c), 19.1.

December 3, 2014

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
ONEX CREDIT PARTNERS, LLC
(the Filer)

AND

IN THE MATTER OF
OCP CREDIT STRATEGY FUND AND OCP SENIOR CREDIT FUND
(collectively, the Funds)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds for a decision under the securities legislation of the Jurisdiction (the Legislation) for exemptive relief from the requirement to obtain prior securityholder approval before changing the fundamental investment objective of the Funds under subsection 5.1(1)(c) of National Instrument 81-102 – Investment Funds (NI 81-102) (the Requested Relief).

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

1.             the Ontario Securities Commission is the principal regulator for this application; and

2.             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 each of the other provinces and territories of Canada (collectively with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 – Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.


Representations

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

1.             The Filer is the manager of the Funds and is registered as a portfolio manager in Ontario, an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, and an exempt market dealer in all the Jurisdictions. The head office of the Filer is located in New Jersey.

2.             Each Fund is an investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust.

3.             Neither the Filer nor the Funds are in default of securities legislation in any Jurisdiction.

4.             OCP Credit Strategy Fund is a non-redeemable investment fund. Its units were qualified for distribution pursuant to a prospectus dated November 20, 2009, that was prepared and filed in accordance with the securities legislation of all the provinces of Canada. Accordingly, OCP Credit Strategy Fund is a reporting issuer or the equivalent in each province of Canada. The units of OCP Credit Strategy Fund are listed and posted for trading on the Toronto Stock Exchange (the TSX).

5.             OCP Senior Credit Fund is a non-redeemable investment fund. Its units were qualified for distribution pursuant to a prospectus dated November 19, 2010, that was prepared and filed in accordance with the securities legislation of the Jurisdictions. Accordingly, OCP Senior Credit Fund is a reporting issuer or the equivalent in each Jurisdiction. The units of OCP Senior Credit Fund are listed and posted for trading on the TSX.

6.             Under its current investment objective and strategies, each Fund may enter into character conversion transactions. Each Fund is a party to a forward purchase and sale agreement (each, a Forward Agreement). Each Forward Agreement provides the applicable Fund with exposure to the returns of the securities of another investment fund (the Reference Fund). The current investment objective of each Fund is set out below:

Fund

Investment Objective

OCP Credit Strategy Fund

The investment objectives of the Fund are, through exposure to the an actively managed portfolio (the Portfolio) consisting primarily of senior debt obligations:

(i)            to maximize total returns for securityholders, on a tax-advantaged basis;

(ii)           to provide securityholders with attractive, quarterly, tax-advantaged distributions, initially targeted to be $0.70 per annum, representing an annual yield of 7% based on the original issue price of $10.00 per Unit; and

(iii)          to preserve capital.

To achieve exposure to the Portfolio, the Fund will enter into the Forward Agreement with a Canadian chartered bank or one of its affiliates whose obligations are guaranteed by the Canadian chartered bank (the Counterparty). The Fund will pre-pay in cash or in kind its purchase obligations under the Forward Agreement, and the Counterparty will agree to deliver to the Fund on the forward termination date (or earlier in whole or in part at the request of the Fund) a portfolio of Canadian securities with an aggregate value equal to the redemption proceeds of the relevant number of units of the reference fund, net of any amount owing by the Fund to the Counterparty.

OCP Senior Credit Fund

The investment objectives of the Fund are, through exposure to the Portfolio:

(i)            to provide securityholders with attractive, quarterly, tax-advantaged distributions, initially targeted to be $0.125 per quarter, representing an annual yield of 5% based on the original issue price of $10.00 per Unit;

(ii)           to preserve capital; and

(iii)          to generate enhanced return through increasing cash flow to the OCP Credit Trust Portfolio as interest rates rise.

To achieve exposure to the Portfolio, the Fund will enter into the Forward Agreement with the Counterparty. The Fund will pre-pay in cash or in kind its purchase obligations under the Forward Agreement, and the Counterparty will agree to deliver to the Fund on the forward termination date (or earlier in whole or in part at the request of the Fund) a portfolio of Canadian securities with an aggregate value equal to the redemption proceeds of the relevant number of units of the reference fund, net of any amount owing by the Fund to the Counterparty.

 

7.             Through the use of the Forward Agreements, each Fund provides tax-advantaged distributions to securityholders because each Fund will realize capital gains (or capital losses) on the disposition of securities acquired under the Forward Agreements, rather than ordinary income. Ordinary income is subject to tax at a higher rate in Canada than capital gains.

8.             The Forward Agreements with respect to OCP Credit Strategy Fund and OCP Senior Credit Fund are expected to terminate on December 29, 2014 and November 19, 2015, respectively (the Termination Dates).

9.             The Income Tax Act (Canada) was amended in December 2013 to implement proposals that were first announced in the March 21, 2013 federal budget regarding the income tax treatment of character conversion transactions (the Tax Changes). Under the Tax Changes, the favourable tax treatment of character conversion transactions will be eliminated after a prescribed date (the Effective Date). The Effective Date for each Fund will be the applicable Termination Date.

10.          As a result of the Tax Changes, it was anticipated that the Forward Agreements would no longer be able to, over the long term, provide material tax efficiency to securityholders of the Funds. As a result, the Filer determined that, upon the termination of the Forward Agreements, each Fund would own its portfolio of investments directly rather than through the Reference Fund, and the corresponding Reference Fund for each Fund will be wound up.

11.          The Filer has determined that, as a result of the Tax Changes, it would be more efficient and less costly for each Fund to seek to achieve its fundamental investment objective after the Effective Date by investing its assets in the same, or substantially the same, assets as those held by the applicable Reference Fund. The Filer will also continue to manage the portfolio of each Fund in as tax-efficient a manner as possible.

12.          The Filer wishes to amend the investment objectives of each Fund to remove all references to the use of Forward Agreements to gain exposure to the applicable Reference Fund, to delete references to “tax-advantaged” distributions and to reflect that each Fund will invest directly in securities similar to those held by the applicable Reference Fund. Other than for the loss of tax efficiency resulting from the Tax Changes, each Fund will have the same investment attributes under its amended investment objectives as exist under its current investment objectives.

13.          Following such amendment, the revised investment objectives of each Fund will be as set out below:

Fund

Investment Objective

OCP Credit Strategy Fund

The investment objectives of the Fund are:

(i)            to maximize total returns for securityholders;

(ii)           to provide securityholders with attractive, quarterly, distributions, initially targeted to be $0.70 per annum, representing an annual yield of 7% based on the original issue price of $10.00 per Unit; and

(iii)          to preserve capital;

by investing in a portfolio comprised primarily of senior debt obligations of non-investment grade North American issuers.

 

OCP Senior Credit Fund

The investment objectives of the Fund are:

(i)            to provide securityholders with attractive, quarterly distributions, initially targeted to be $0.125 per quarter, representing an annual yield of 5% based on the original issue price of $10.00 per Unit;

(ii)           to preserve capital; and

(iii)          to generate enhanced return through increasing cash flow to the portfolio as interest rates rise;

by investing in a portfolio comprised of senior secured loans and other senior debt obligations of non-investment grade issuers.

14.          The Filer has complied with the material change report requirements set out in Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure in connection with the Filer’s decision to make the changes to the investment objectives of the Funds set out above.

15.          The Filer has determined that it would be in the best interests of each Fund and not prejudicial to the public interest to receive the Requested Relief.

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 Requested Relief is granted, provided that, at least 30 days before the effective date of the change in the investment objectives of each Fund, the Filer will send to each securityholder of each Fund a written notice that sets out the change to the investment objective, the reasons for such change and a statement that such Fund will no longer distribute gains under forward contracts that are treated as capital gains for tax purposes.

“Vera Nunes”
Manager, Investment Funds and Structured Products
Ontario Securities Commission