Published 11 September 2020, The Daily Tribune

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.

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