National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval granted under NI 81-102 for reorganization of non-redeemable investment funds that will result in securityholders becoming securityholders of a different mutual fund -- approval needed because pre-approval conditions for mergers won't be met because investment objectives, fee structure not substantially similar, and terminating funds will not offer special redemption right at net asset value prior to the merger date -- continuing fund larger with a more diversified portfolio than terminating funds -- mergers will result in comparable or lower MERs for terminating fund securityholders -- mergers to otherwise comply with pre-approval criteria, including securityholder, IRC approval.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.5(1)(b), 5.7(1)(b).
August 27, 2015
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 EXCEL FUNDS MANAGEMENT INC. (the Filer) AND EXCEL LATIN AMERICA BOND FUND AND EXCEL LATIN AMERICA BOND FUND II (each a Terminating Fund and collectively the Terminating Funds)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval (the Approval Sought) under subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) to merge (the Mergers) each Terminating Fund into Excel High Income Fund (the Continuing Fund, and together with each Terminating Fund, the Funds).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator (the Principal Regulator) for this application; and
(ii) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (the Other Jurisdictions and together with the Jurisdiction, the Jurisdictions).
Defined terms contained in NI 81-102, National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless they are defined in this decision.
This Decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the laws of the Province of Ontario with its head office in Mississauga, Ontario.
2. The Filer is the investment fund manager of the Funds and is registered as an investment fund manager in the Provinces of Newfoundland and Labrador, Ontario and Quebec.
3. The Filer is not in default of the securities legislation of any of the Jurisdictions.
The Terminating Funds
4. Each Terminating Fund is a non-redeemable investment fund trust established under the laws of the Province of Ontario. Each Terminating Fund is a reporting issuer in the Jurisdictions. The Terminating Funds are not in default of the securities legislation of any of the Jurisdictions.
5. Excel Latin America Bond Fund offers two classes of securities, initially distributed pursuant to a prospectus dated May 30, 2012 -- Class A units and Class F units. Excel Latin America Bond Fund II offers three classes of securities initially distributed pursuant to a prospectus dated April 23, 2013 -- Class A units, Class F units and Class U units.
6. The Class A units of each Terminating Fund are listed for trading on the Toronto Stock Exchange. The Class F units of each Terminating Fund are designed for fee-based accounts. The Class U units of Excel Latin America Bond Fund II are designed for investors who wished to make their investment in U.S. dollars. Since its respective initial public offering, neither Terminating Fund has issued any additional securities.
The Continuing Fund
7. The Continuing Fund is an open-ended mutual fund trust established under the laws of the Province of Ontario. The Continuing Fund is a reporting issuer in each of the Jurisdictions. The Continuing Fund is not in default of the securities legislation in any of the Jurisdictions.
8. Units of the Continuing Fund are in continuous distribution pursuant to a simplified prospectus dated September 30, 2014. The Continuing Fund offers two classes of securities -- Series A and Series F.
9. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices established under NI 81-102.
10. The net asset value for each series of the Funds is calculated on a daily basis in accordance with the Funds' valuation policy and as described in their respective offering documents.
11. A press release announcing each proposed Merger was issued on June 18, 2015 and subsequently filed via SEDAR. A material change report with respect to each Terminating Fund regarding the proposed Mergers was filed via SEDAR on the same date.
12. As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), an Independent Review Committee (the IRC) has been appointed for the Funds. The Manager presented the potential conflict of interest matters related to the proposed Mergers to the IRC for a recommendation on June 9, 2015, in order for the IRC to determine that the proposed Mergers, if implemented, would achieve a fair and reasonable result for each of the Funds.
13. The Filer has determined that the proposed Mergers will not be a material change for the Continuing Fund.
14. Approval of the Mergers is required because the Mergers do not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102, namely because: (i) a reasonable person may not consider the fundamental investment objectives of the Terminating Funds and that of the Continuing Fund to be "substantially similar"; (ii) a reasonable person may not consider the fee structure of the Terminating Funds and that of the Continuing Fund to be "substantially similar"; and (iii) unitholders of the Terminating Funds will not be provided with a right to redeem their units at a price equal to their net asset value per unit prior to the date of the Mergers.
15. Each Merger will be effected as a "qualifying exchange" or a tax deferred transaction under the Income Tax Act (Canada) (the Tax Act).
16. A notice of meeting, management information circular and proxies in connection with each Merger were mailed to unitholders of each Terminating Fund on July 24, 2015 and were subsequently filed on SEDAR. The most recently-filed fund facts documents of the Continuing Fund were also included in the meeting materials sent to unitholders of the Terminating Funds.
17. The Filer will pay all costs and reasonable expenses relating to the solicitation of proxies and holding the unitholder meetings in connection with the Mergers as well as the costs of implementing the Mergers.
18. The Class A and Class F unitholders of Excel Latin America Bond Fund and the Class A, Class F and Class U unitholders of Excel Latin America Bond Fund II separately approved each respective Merger at special meetings of each Terminating Fund held on August 24, 2015.
19. If the Approval Sought is obtained, it is anticipated that the Mergers will each be implemented on or about September 3, 2015 (the Merger Date). Following the Mergers, the Continuing Fund will continue as a publicly-offered open end mutual fund trust and each Terminating Fund will be wound up as soon as reasonably practicable and in any case within 60 days of the Merger Date.
20. If the Approval Sought is obtained, the following steps will be carried out to effect the Mergers:
(a) On or about August 31, 2015, each Terminating Fund will de-list its Class A units from the Toronto Stock Exchange.
(b) Prior to effecting its Merger, Excel Latin America Bond Fund will settle (the Settlement) the share basket forward agreement (the Forward Agreement) it has in place with a Schedule I Canadian chartered bank (the Counterparty) and in connection with the Settlement will receive a portfolio of Canadian publicly traded securities (the Equity Basket). Excel Latin America Bond Fund will then sell the securities comprising the Equity Basket such that prior to the Merger it will only hold cash.
(c) Prior to effecting its Merger, Excel Latin America Bond Fund II will sell all of the securities in its portfolio such that prior to the Merger it will only hold cash.
(d) As a result, each Terminating Fund will temporarily hold cash and will not be fully invested in accordance with its investment objectives for a brief period of time prior to its respective Merger being effected.
(e) The respective declaration of trust of each Terminating Fund will be amended to the extent necessary to give effect to the Mergers.
(f) With respect to the Merger of Excel Latin America Bond Fund, the Settlement will trigger a capital loss inherent under the Forward Agreement for the Fund.
(g) The Continuing Fund will not assume any liabilities of the Terminating Funds and each Terminating Fund will retain sufficient cash to satisfy its estimated liabilities, if any, as of the Merger Date.
(h) Each Terminating Fund will determine the amount of income and net taxable gains (if any) it has realized during the taxation year including the Merger Date. If applicable, each Terminating Fund will distribute sufficient net income and net capital gains to its unitholders to ensure that the Terminating Fund will not be subject to tax under the Tax Act.
(i) On the Merger Date, each Terminating Fund will use the remaining cash to acquire units of the Continuing Fund at their applicable series net asset value per unit as of the close of business on the effective date of the Merger. The Series A units and Series F units of the Continuing Fund acquired by each Terminating Fund will have an aggregate net asset value equal to the value of the applicable Terminating Fund's net assets as of the close of business on the last valuation date for the Terminating Fund immediately preceding the Merger Date.
(j) Each Terminating Fund will cause all of its outstanding units to be redeemed and will distribute the units of the Continuing Fund held in its portfolio as a payment "in kind" of the redemption price of the redeemed units, so that following the distribution, unitholders of each Terminating Fund will become direct unitholders of the Continuing Fund.
(k) This will result in each unitholder of the Terminating Funds receiving units of the applicable series of the Continuing Fund with a value equal to the net asset value of the units of the Terminating Fund the unitholder held of the relevant class of the Terminating Fund. Class A and Class F unitholders of each Terminating Fund will receive the equivalent number of Series A and Series F units respectively, of the Continuing Fund. Class U unitholders of Excel Latin America Bond Fund II will receive the equivalent number of Series A units of the Continuing Fund issued under the U.S. dollar purchase option.
(l) The Funds will jointly file an election to have each Merger effected as a "qualifying exchange" under the Tax Act.
(m) Following the Mergers, and in any case within 60 days thereof, each Terminating Fund will be wound up.
21. The Filer believes that the Merger will be beneficial to unitholders of each of the Terminating Funds for the following reasons:
(a) The investment objective of the Continuing Fund offers more diversification and exposure to a portfolio with higher credit quality and less historical volatility than the investment objectives of the Terminating Funds. Unitholders of the Terminating Funds will also be able to benefit from the portfolio advisory and sub-advisory services of Amundi S.A. and Amundi Canada Inc. Based on its historical standard deviation, the Continuing Fund is rated low-medium risk compared to the Terminating Funds which are each rated as high risk;
(b) The units of the Continuing Fund are redeemable daily at a price based on NAV per unit;
(c) The Continuing Fund has a larger portfolio and will have the potential to have an even larger portfolio, as the Continuing Fund will be in continuous distribution, and is expected to offer up the potential for enhanced portfolio diversification to unitholders;
(d) Unitholders of each of the Terminating Funds will exchange their respective units for units of the Continuing Fund on a tax-deferred rollover basis. The Merger of the Terminating Funds with the Continuing Fund will occur on a tax-deferred basis; and
(e) In the case of the Merger between Excel Latin America Bond Fund and the Continuing Fund, unitholders of Excel Latin America Bond Fund who will continue as unitholders of the Continuing Fund will benefit from the lower management expense ratio of the Continuing Fund as compared to that of the Terminating Fund.
22. The unitholders of the Terminating Fund will not be provided with a right to redeem their units prior to the Merger Date because, as the Continuing Fund is an open-end mutual fund, the Continuing Fund will provide the unitholders of each of the Terminating Funds with a right to redeem their units at the net asset value per unit on the business day immediately following the completion of the Merger.
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 Approval Sought is granted.