NBC Asset Trust
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Dual application -- Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions -- Minority approval of a related party transaction -- Application for relief from requirement to require minority approval -- Securities are technically equity securities but are akin to preferred shares -- Sale of trust assets at equivalent fair value.
Applicable Legislative Provisions
Securities Act (Québec), s. 263.
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 5.6 and 9.1.
December 16, 2019
IN THE MATTER OF THE SECURITIES LEGISLATION OF QUÉBEC AND ONTARIO (the "Jurisdictions") AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF NBC ASSET TRUSTTM (the "Filer")
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (each a "Decision Maker") has received an application (the "Application") from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") for an exemption from the requirement to obtain minority approval from every class of affected securities as set out in Regulation 61-101 respecting Protection of Minority Security Holders in Special Transactions, CQLR, V-1.1, r. 33 ("Regulation 61-101") in connection with a proposed related party transaction (as defined in Regulation 61-101) in connection with the proposed Sale of Trust Assets (as defined below) to National Bank of Canada (the "Exemption Sought").
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers is the principal regulator for this Application;
(b) the Filer has provided notice that Subsection 4.7(1) of Regulation 11-102 respecting Passport System, CQLR, c. V-1.1, r. 1 ("Regulation 11-102") is intended to be relied upon by the Filer in Alberta, Manitoba and New Brunswick; and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Interpretation
Terms defined in Regulation 14-101 respecting Definitions, CQLR, c. V-1.1, r. 3, Regulation 11-102 and Regulation 61-101 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:
The Filer
1. The Filer is a closed-end trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of December 17, 2007, as amended and restated by an amended and restated declaration of trust dated January 22, 2008 as further amended by a first supplemental declaration of trust dated as of June 30, 2008 and a second supplemental declaration of trust dated as of July 14, 2010 (the "Declaration of Trust").
2. Natcan Trust Company is the trustee of the Filer (the "Trustee").
3. The Filer's head office is located in Québec.
4. The Filer was established solely for the purpose of effecting offerings of securities to provide National Bank of Canada (the "Bank") with a cost-effective means of raising capital for regulatory purposes under the Bank Act (Canada) (the "Bank Act"). The Bank is the administrative agent ("Administrative Agent") of the Filer pursuant to an administrative and advisory agreement ("Administrative and Advisory Agreement") entered into between the Trustee and the Bank on December 17, 2007 and as such administers the affairs of the Filer.
5. The Filer is a reporting issuer in each of the provinces of Canada and is not in default of any requirement of the securities legislation in the jurisdictions in which it is a reporting issuer.
6. The objective of the Filer is to acquire, with the proceeds of offerings of securities, and hold assets ("Trust Assets") primarily from the Bank or its affiliates, generally on a fully-serviced basis, which consist of: residential mortgages, mortgage co-ownership interests, mortgage-backed securities and eligible investments. The Bank and its affiliates are responsible for the servicing of the Trust Assets, including reporting on the performance of the Trust Assets and investment of the proceeds of the Trust Assets. The Trust Assets generate income for distribution to holders of Trust Securities. The Filer does not, and will not, carry on any operating activity other than in connection with offerings of securities.
The Bank
7. The Bank is a chartered bank subject to the provisions of the Bank Act.
8. The Bank's head office is located in Québec.
9. The Bank is a reporting issuer in each of the provinces of Canada and is not in default of any requirement of the securities legislation in the jurisdictions in which it is a reporting issuer.
Trust Securities
10. The capital of the Filer consists of special trust securities (the "Special Trust Securities") and transferable trust units called Trust Capital Securities -- Series 2 ("NBC CapS II" and, together, the "Trust Securities").
11. There are currently $700 million of Special Trust Securities issued and outstanding, which are all held by the Bank and $350 million of NBC CapS II issued and outstanding, which are held by the public.
12. The Trust Securities are not listed and posted for trading on any stock exchange.
13. The Special Trust Securities are the only voting securities of the Filer.
14. The NBC CapS II qualified as Tier 1 capital of the Bank under the Innovative Capital Guidelines, as amended, issued by the Office of the Superintendent of Financial Institutions (Canada) (the "Superintendent") pursuant to the Bank Act.
15. The terms of the NBC CapS II include the following:
(a) The NBC CapS II pay a fixed non-cumulative distribution (the "Indicated Distribution") on the last day of June and December in each year. Each semi-annual payment date for the Indicated Distribution in respect of the NBC CapS II (a "Distribution Date") will be either a Regular Distribution Date (as defined below) or a Distribution Diversion Date. A Distribution Date will be a "Distribution Diversion Date" when the Indicated Distribution will not be paid in respect of the NBC CapS II but, instead, the Filer will pay the net distributable funds of the Filer to the Bank as holder of the Special Trust Securities if: (i) the Bank has failed to declare regular dividends on the Bank preferred shares of any series in the prescribed time; or (ii) if no Bank preferred shares are then outstanding, the Bank has failed to declare regular dividends on the Bank common shares in the prescribed time. In all other cases, a Distribution Date will be a regular distribution date (the "Regular Distribution Date"), in which case holders of NBC CapS II will be entitled to receive the Indicated Distribution and the Bank, as holder of the Special Trust Securities, will be entitled to receive the net distributable income, if any, of the Filer remaining after payment of the Indicated Distribution. The Bank preferred shares and the Bank common shares are hereinafter collectively referred to as the "Dividend Restricted Shares".
(b) Under the Bank Share Exchange Agreements dated January 22, 2008 and June 30, 2008 entered into among the Bank, the Filer and a party acting as exchange trustee (the "Bank Share Exchange Agreements"), the Bank agreed, for the benefit of the holders of NBC CapS II, that in the event that the Filer fails on any Regular Distribution Date to pay the Indicated Distribution on the NBC CapS II in full, the Bank will not pay dividends on the Dividend Restricted Shares until a specified period of time has elapsed, unless the Filer first pays such Indicated Distribution (or the unpaid portion thereof) to holders of NBC CapS II (the "Dividend Stopper Undertaking").
(c) The NBC CapS II will be automatically exchanged, without the consent of the holder, for newly issued First Preferred Shares Series 23 of the Bank (the "Bank Preferred Shares") upon the occurrence of certain circumstances (an "Automatic Exchange").
(d) The Filer may, subject to the approval of the Superintendent, on July 31, 2013 and on each Distribution Date thereafter, redeem the NBC CapS II. The price payable in respect of any such redemption will include an early redemption compensation component (the "Early Redemption Price") in the event of a redemption prior to June 30, 2020 (the "Early Redemption Date"). On or after June 30, 2020, the price payable will be $1,000 per NBC CapS II together with any unpaid Indicated Distribution thereon (the "Redemption Price").
(e) Upon the occurrence of certain regulatory or tax events affecting the Bank or the Filer (a "Special Event"), in each case prior to the Early Redemption Date, the Filer may, subject to approval of the Superintendent, redeem all but not less than all of the NBC CapS II, as the case may be, at the Early Redemption Price.
(f) The Bank has covenanted that all of the outstanding Special Trust Securities will be held by it at all times. Except for the initial $140 million of Special Trust Securities issued to the Bank in January 2008, all other Special Trust Securities held by the Bank are redeemable, in whole or in part, at any time or from time to time, at the option of the Bank, subject to Superintendent approval.
(g) As long as any NBC CapS II are outstanding and are held by any person other than the Bank, the Filer may only be terminated with the approval of the Bank as the sole holder of the Special Trust Securities and with the approval of the Superintendent: (i) upon the occurrence of a Special Event prior to July 31, 2013; or (ii) for any reason on July 31, 2013 or any Distribution Date thereafter. Holders of each series of outstanding Trust Securities will rank pari passu in the distribution of the property of the Filer in the event of a termination of the Filer after the discharge of any creditor claims. As long as any NBC CapS II are outstanding and held by any person other than the Bank, the Bank will not approve the termination of the Filer unless the Filer has sufficient funds to pay the Early Redemption Price in the case of a termination prior to the Early Redemption Date, or the Redemption Price in the case of a termination at any other time.
(h) The NBC CapS II are non-voting except in limited circumstances.
(i) Except to the extent that the Indicated Distribution is payable to holders of NBC CapS II, and other than in the event of a termination of the Filer, the NBC CapS II holders have no claim or entitlement to the income of the Filer or the assets held by the Filer.
16. Pursuant to the Administrative and Advisory Agreement, the Trustee has delegated to the Bank certain of its obligations in relation to the administration of the Filer. The Bank, as advisor and Administrative Agent, provides advice and counsel with respect to the management of the Trust Assets and administers the day-to-day operations of the Filer and provides other advice or counsel as may be requested by the Trustee from time to time.
Sale of Trust Assets
17. The Filer intends to sell, by no later than December 18, 2019, approximately $550 million of Trust Assets to the Bank at fair market value, in consideration of the payment by the Bank, and transfer to the Filer, at fair market value of a combination of residential mortgages and mortgage co-ownership interests, as permitted by the Declaration of Trust (the "Sale of Trust Assets").
18. The combination of residential mortgages and co-ownership interests transferred by the Bank to the Filer will have an equivalent fair market value to the Trust Assets being transferred by the Filer to the Bank.
19. The Bank and the Filer propose to proceed with the Sale of Trust Assets on the basis of a value that would be established between arms' length parties transacting similar pool of assets in an open market. For these kinds of assets, the methodology generally used and adopted by market participants acting at arms' length to evaluate the fair market value of loans of a similar nature to those comprising the assets of the Filer subject to the Sale of Trust Assets is as follows: market value will be determined by calculating the present value of expected cash flows. Cash flows will be discounted based on a term-range yield curve. The yield curve will be built using current market mortgage rates.
20. The methodologies used to evaluate the fair market value of the Trust Assets being transferred by the Filer to the Bank will be the same as the methodologies used to evaluate the fair market value of the residential mortgages and mortgage co-ownership interests being received by the Filer from the Bank as consideration.
21. The Bank and the Filer undertook to the Superintendent that the book value of the net assets of the Filer, less (i) undistributed income of the Filer and (ii) contributed surplus (if any) arising from the difference in the book values and tax values of assets acquired by the Filer, will not at any time exceed the aggregate issue price of all series of NBC CapS II issued by the Filer (namely $350 million) by more than 200% without the Superintendent's approval (the "Ratio"). The Ratio is currently at approximately 200%.
22. The Sale of Trust Assets will have no effect on the book value of the net assets of the Trust or the Ratio.
23. The Sale of Trust Assets will have no impact on the credit ratings of the NBC CapS II.
24. The sole purpose of the Sale of Trust Assets is to reduce the pool of residential mortgages' sensitivity to interest rate variations by replacing loans with the highest remaining terms to maturity by loans with lower terms to maturity.
Minority Approval
25. The Sale of Trust Assets is subject to related party transaction requirements provided in Part 5 of Regulation 61-101.
26. Pursuant to subsection 5.5(b) of Regulation 61-101, the Filer is exempt from the formal valuation requirement for the Sale of Trust Assets.
27. Absent the granting of the Exemption Sought, the Filer would be required to obtain minority approval from the holders of NBC CapS II in connection with the Sale of Trust Assets.
28. But for the fact that NBC CapS II provide a residual right to participate in the assets of the Filer upon its termination and, accordingly, constitute "equity securities" within the meaning of Regulation 61-101, no minority approval would have been required in connection with the Sale of Trust Assets.
29. The payment of the Indicated Distribution on the NBC CapS II is entirely dependent on the income stream generated by the Trust Assets held by the Filer. It is in the Bank's interest to ensure that, on any Regular Distribution Date, holders of NBC CapS II receive the Indicated Distribution since, if the Filer fails to pay the Indicated Distribution on such date, the Dividend Stopper Undertaking will preclude the Bank from paying dividends on the Dividend Restricted Shares for a specified period of time. Accordingly, the Bank would have an incentive to provide support to the Filer if the Filer is unable to pay the Indicated Distribution, since such a failure would have a significant adverse effect on the price of the Dividend Restricted Shares as well as the Bank's ability to raise capital (the "Incentive").
30. Given the Incentive and taking into account the terms of the NBC CapS II, the rights and economic interests of the holders of NBC CapS II are protected.
31. Under the terms of the Declaration of Trust, the Sale of Trust Assets is permitted and no approvals of the Trust Security holders and Superintendent are required.
32. The policy objectives of Regulation 61-101 are not served by imposing the vote of minority security holders in the context of the Sale of Trust Assets.
Decision
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted.