New ‘rules’ for mortgage investment corporations

Barry Critchley
Financial Post


Talk about timing.

Three months back, Calgary-based Builder’s Capital Mortgage Corp. filed a prospectus for an initial public offering of subscription receipts: the then non-redeemable investment fund hoped to raise between $10-million and $30-million and use that to invest in a portfolio of construction mortgages. The fund intended to qualify as a mortgage investment corporation under the Tax Act.

One week back, the same issuer, which already was a reporting issuer, filed an amended and restated preliminary prospectus for an initial public offering with the goal being to raise $20-million to $40-million. But three months on, Builder’s Capital has become a corporation even though it still has the same goal of qualifying as a mortgage investment corporation under the tax act.

So why the difference between the two filings – the later runs to 270 pages while the original filing was a more modest 80 pages — over such a short period of time?

Put it down to two proposals. The first would prohibit any investment fund from investing in mortgages other than mortgages that are fully and unconditionally guaranteed by the government of Canada, the government of a province or territory of Canada or by an agency of such governments.

The second proposal came from the Canadian Securities Administrators. In late March, the CSA put the proposals out for comment to be posted back by the end of June. In an April 2013 review of the proposed changes, Blakes said “the proposals seek to impose core operational requirements and investment restrictions upon CEFs [closed-ended funds] that currently only apply to publicly offered mutual funds and exchange traded funds.”

It termed the proposals “a fundamental rethink,” noting that they included investment restrictions, as well as a change whereby “offering expenses incurred in connection with the CEF’s initial public offering may no longer be borne by the fund.”

One other observer noted that under the proposals it was determined that “mortgage investment corporations [MIC] are not investment funds. That’s the crux of this,” he said noting that the changes will affect a slew of issuers.

This observer added that under the March 27 proposals , “the public MICs [which at the time were investment funds] would only be allowed to invest in insured mortgages. They were directed to investment funds but MICs got caught up because they were classified as investment funds. The second change occurred when MICs were deemed to be industrial issuers.”

The result: proposals about limitations on insured mortgages become “moot,” – though existing issuers will have to redefine themselves as a corporation and not as an investment fund.

Indeed, at least one MIC has detailed plans to conform to the new landscape. Timbercreek Mortgage Investment Corp. has called a special meeting of shareholders to transition from the Canadian securities regulatory regime for investment funds to the regulatory regime for non-investment fund reporting issuers.

In a recent release, it indicated the extent of the changes as it moves to a corporate structure, which will be decided by at a Sept. 9 meeting. It will affect reporting (every quarter vs every six months); governance; shareholder rights (to voting shares from non-voting); redemption rights (to none normally except a one-time right if the transition is approved from once a year); and trailer fees (to none from 50 basis points.) But as an example of the blend: investors in Builder’s Capital’s deal are being offered a retraction option once a year at 95% of net asset value.