North American Financials

Summaries
North American Financials' elimination of net settlement forward
Overview

The Trust's Declaration of Trust is proposed to be amended to accommodate the extension of the term of the Trust to 2019 and a revised structure (reflecting the introduction of the character conversion rules) under which it will hold its subordinated bank securities (including European bank securities) and other securities directly rather than indirectly through a forward purchase and sale structure.

Requested Amendments

Unitholders are being asked to among other things to approve an extension (the ''Extension'') including amendments to the Trust Agreement to:

  • extend the scheduled termination date (the ''Scheduled Termination Date'') of the Trust to November 30, 2019;
  • extend the investment objectives of the Trust to include securities (including European securities) that comply with the new Basel III regulatory requirements and to enable the Trust to hold the portfolio of investments directly following the termination of the Forward Agreement; and
  • provide Unitholders who do not wish to continue their investment with a special redemption right to enable such Unitholders to redeem their Units on December 1, 2014 on the same terms that would have applied had the Trust redeemed all Units on such date as originally contemplated.
Trust

The Trust is an Ontario investment fund with Aston Hill Capital Markets Inc. (formerly, Connor, Clark & Lunn Capital Markets Inc.), as manager (the ''Manager'') and RBC Investor Services Trust as trustee. Its Class A units trade on the TSX.

Portfolio

Distributions are targeted to be $1.50 per annum per Unit. The Trust obtains exposure to the performance of a portfolio (the ''Portfolio'') of Canadian capital securities held by North American Portfolio Trust (the ''Portfolio Trust''). The Trust's Manager also actively manages the Portfolio. The Portfolio consists primarily of Canadian Innovative Tier 1 Capital Securities issued by banks or entities related to banks and U.S. Financials Capital Securities. All future capital instruments have a provision that requires such instruments, at the option of the relevant authorities or by contractual provision, to either be written off or converted into common equity upon the occurrence of a trigger event. The Portfolio manager may also invest up to 15% of the Portfolio (measured at the time of investment) in other bonds with a minimum issuer rating of ''A'' by S&P.

Forward Agreement

The Trust does not hold the Portfolio directly but instead obtains exposure to the Portfolio through the forward purchase and sale agreement (the ''Forward Agreement'') with The Bank of Montreal, as counterparty. Under the Forward Agreement, the Trust will receive, on termination, a specified portfolio consisting of securities of Canadian public issuers that are ''Canadian securities'' for the purposes of the Tax Act (''Canadian Securities'') in an amount equal to the value of Portfolio Trust.

Canadian tax consequences

Special distribution/ordinary distributions. It is expected that the Trust will incur a capital gain as a result of the liquidation of Canadian securities acquired under the Forward Agreement. If the Extension occurs, to the extent the Trust realizes a capital gain which cannot otherwise be sheltered, the Trust currently intends to declare a special capital gains distribution to Unitholders of record on December 1, 2014, rather than pay tax in the Trust (the ''Special Distribution''). A portion of the Special Distribution will be paid in cash in order to offset all or part of the tax liability of Unitholders resulting from any such capital gains distribution. In addition, following the termination of the Forward Agreement, distributions paid by the Trust will be characterized primarily as income for tax purposes to the extent they exceed available non-capital losses.

DFA rules

As a result of certain grandfathering rules, the character conversion rules (introduced on December 12, 2013) should not apply to the Forward Agreement provided that it is settled prior to the end of 2014 - so that no amount will be included in computing the Trust's income as a result of the acquisition of Canadian Securities Portfolio securities under the Forward Agreement when the Forward Agreement is settled on or about November 30, 2014.