18 September 2020
The Securities and Exchange Commission (SEC) recently approved a regulatory framework for the creation and operation of “Corporate Debt Vehicles.” As special investment vehicles which primarily finance corporate debt papers, much optimism is created by the CDVs’ unique position to help businesses regain their viability during and in the aftermath of the COVID-19 pandemic.
How do CDVs work, and why are they investment avenues worthy of attention?
Under SEC Memorandum Circular No. 23, Series of 2020 or the Rules on Corporate Debt Vehicle, a CDV has the specific objective of investing in the Corporate Debts of large corporations and medium-sized enterprises. To qualify, a CDV must be a closed-end investment company or an investment company that offers for sale of fixed number of units of participation or shares which cannot be redeemed at any time. A CDV issues or offers for sale its securities consisting of either shares of stock or units of participation limited to (1) any number of qualified buyers and/ or (2) not exceeding 19 persons in case of non-qualified buyers in the Philippines during any 12 month period.
Qualified buyers refer to banks, registered investment houses, insurance companies, pension fund or retirement plans maintained by the government or other persons authorized by the Bangko Sentral ng Pilipinas (BSP). It can also mean individuals with annual gross income or total portfolio investment of at least Php 10 Million, or personal net worth of at least Php 30 Million, or is previously engaged in securities trading. Corporations with gross assets of Php 100 Million or portfolio investment in registered securities of at least Php 60 million are also qualified.
Since a CDV will be taking a significant risk in making the investment, the SEC requires it to have a minimum subscribed and paid-up capital of Php 50 Million, or Php 1 Million if already in existence to be managed or under management by the same Fund Manager with a track record of at least 5 years.
As an offeror of securities, CDVs must file a notarized simplified Prospectus and Product Highlight Sheet for approval of the SEC prior to the commencement of the offer. It must contain critical information on the securities offered to guide the SEC and the potential investors on the features, benefits, returns and risks of the securities.
What about the notable features of a CDV for prospective qualified investors? After all, it is an investment vehicle, first and foremost.
Under the Rules, a CDV may offer several share or unit classes managed as separate asset pools with the same investment objectives, hence providing diversification while hedging risk. In terms of income distribution, a CDV may make periodic distribution of income to investors of the fund on a pro-rata basis; provided, that the distribution of income shall be made only from cash received from interest income earned after deduction of applicable taxes and expenses.
CDVs issuing units of participation are exempt from SEC Memorandum Circular No.11, series of 2008 (Guidelines on the Determination of Retained Earnings Available for Dividend Declaration) or any amendment thereto, hence dividend declaration may appear to be more flexible. The CDV is allowed to pay out the value of the underlying investments of each share/unit in a class upon maturity of said underlying investments.
Further, the CDV need not be listed or traded in an exchange. Under the Rules, the sale of CDV securities to any number of any qualified buyers and/or non-qualified buyers not exceeding nineteen (19) persons in the Philippines during any twelve (12)-month period are exempt from the registration requirement under Section 8.1 of the Securities Regulation Code (SRC).
Notwithstanding the CDV’s exemption from securities registration, investors are not left unprotected. The conduct by any person in the purchase, sale, distribution of such securities, settlement and other activities shall still comply with the provisions of the SRC and any applicable rules. Likewise, every investor shall be given an evidence of participation, which clearly indicates the terms and conditions of the CDV.
These innovative features meld flexibility with investor protection. The features of a CDV, if not abused and maintained true to its purpose, may prove a lifeline to preserve employment and sustain business operations. It may also be a profitable venture for the savvy investor. But as with any investment opportunity, one must weigh carefully the risk and assess accordingly, approaching with caution and eyes wide open.
For further information, please contact:
Nilo T. Divina, Managing Partner, DivinaLaw
nilo.divina@divinalaw.com
