Headnote Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption granted from requirement to file a BAR under Part 8 of NI 51-102 for an acquisition that is not significant to the Filer from a commercial, business, practical or financial perspective.
Applicable Legislative Provisions
National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.2, 13.1.
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 ELEMENT FINANCIAL CORPORATION (THE “FILER” OR “ELEMENT”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for an exemption (the “Exemption Sought”) pursuant to Section 13.1 of National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”) from the requirement in Part 8 of NI 51-102 that a business acquisition report (a “BAR”) be prepared and filed with the applicable Canadian securities regulatory authorities in connection with the acquisition (the “Acquisition”) by the Filer of certain finance assets consisting of lease and loan arrangements secured by 59 individual helicopters (the “Acquired Portfolio”) from General Electric Capital Corporation (“GECC”) and Path Air L.L.C. (together with GECC, the “Vendors”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application;
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador.
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 or NI 51-102 have the same meanings if used in this decision, unless otherwise defined herein.
Representations
The decision is based on the following facts represented by the Filer:
The Filer is a corporation formed under the Ontario Business Corporations Act and is a reporting issuer in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador.
The principal and head office of the Filer is located in Toronto, Ontario.
The financial year end of the Filer is December 31.
The Filer is a reporting issuer in each of the provinces of Canada and, to its knowledge, other than the technical requirement to file a BAR in respect of the Acquisition, is not in default of securities legislation in any such jurisdiction in Canada in which it is a reporting issuer.
The common shares, Cumulative 5-Year Rate Reset Preferred Shares, Series A, and Cumulative 5-Year Rate Reset Preferred Shares, Series C, of the Filer are listed on the Toronto Stock Exchange under the symbol “EFN”, “EFN.PR.A” and “EFN.PR.C”, respectively.
The Acquisition
On November 13, 2013, the Filer announced that it had entered into an agreement to purchase the Acquired Portfolio, subject to customary conditions precedent.
The Acquired Portfolio is a portfolio of lease and loan arrangements secured by 59 individual helicopters manufactured by Airbus Helicopters (formerly Eurocopter), Sikorsky Aircraft Corporation and Bell Helicopter (a division of Textron Inc.). The helicopters are operated by a diversified base of customers across a variety of industries primarily based in the United States, including air medical services, offshore oil and gas, and other energy sectors. The lease arrangements are longer-term, with the shortest lease being five years and with the longest lease being fifteen years. The individual lease values range in size from $682,000 to $26.3 million.
Based on publicly available information, the Vendors’ aviation finance portfolio has more than U.S. $47 billion in assets. The Acquired Portfolio comprised only a very small portion of the Vendors’ aviation finance portfolio.
The purchase price for the Acquired Portfolio of approximately US$245 million was determined by the Filer based on the contractual rental payments for each of the individual leases forming the Acquired Portfolio, the credit profile of the individual customers of the leases underlying the Acquired Portfolio and the estimated residual value of the individual helicopters forming the Acquired Portfolio at the end of their respective lease term. No other financial information was available nor made available by the Vendors nor was it considered material to the Filer’s determination of the purchase price for the Acquired Portfolio.
The Acquired Portfolio was acquired by the Filer on December 19, 2013.
The BAR Requirement
Pursuant to Part 8 of NI 51-102, an issuer must file a BAR within 75 days after the date of an acquisition should it be determined that the acquisition was a “significant acquisition”. The three tests for determining whether an acquisition is a “significant acquisition” are set out in section 8.3 of NI 51-102, and are referred to as the “asset test”, the “investment test” and the “profit or loss test”. An acquisition is considered to be a “significant acquisition” if any of the described tests are triggered.
Based on the limited available financial information for the Acquired Portfolio, the Filer has determined that the Acquisition does not trigger the “asset test” in paragraph 8.3(2)(a) of NI 51-102, or the optional “asset test” in paragraph 8.3(4)(a) of NI 51-102. Element’s total assets as at December 31, 2012 and as at September 30, 2013 were $1,508,892,000 and $2,725,955,000, respectively. The Acquired Portfolio would represent approximately 16.6% of Element’s assets as of December 31, 2012 under the “asset test”, and approximately 9.2% of Element’s assets as of September 30, 2013 under the optional “asset test”.
The Filer believes that the “investment test” in paragraphs 8.3(2)(b) and 8.3(4)(b) of NI 51-102 are not applicable in the circumstances.
Paragraph 8.3(2)(c) of NI 51-102 prescribes the required “profit or loss test” as follows:
The reporting issuer’s proportionate share of the consolidated operating income of the business or related businesses exceeds 20% of the consolidated operating income of the reporting issuer calculated using the audited financial statements of each of the reporting issuer and the business or related businesses for the most recently completed financial year of each ended before the date of the acquisition.
Paragraph 8.3(4)(c) of NI 51-102 prescribes the optional “profit or loss test” as follows:
The specified profit or loss calculated under the following subparagraph (i) exceeds 20% of the specified profit or loss calculated under the following subparagraph (ii):
(i) the reporting issuer’s proportionate share of the consolidated specified profit or loss of the business or related businesses for the later of
the most recently completed financial year of the business or related businesses; or
the 12 months ended on the last day of the most recently completed interim period of the business or related businesses;
(ii) the reporting issuer’s consolidated specified profit or loss for the later of
the most recently completed financial year, without giving effect to the acquisition; or
the 12 months ended on the last day of the most recently completed interim period of the reporting issuer, without giving effect to the acquisition.
While the acquisition of the Acquired Portfolio would not trigger the requirement for the Filer to file a BAR pursuant to the “asset test” or the “investment test”, the acquisition of the Acquired Portfolio would trigger the requirement for the Filer to file a BAR pursuant to the “profit or loss test” and the optional “profit and loss test” as such estimated future annual income from the Acquired Portfolio is greater than 20% of the absolute value of Element’s losses for the relevant periods. As a result of four significant acquisitions completed by Element in 2012 and 2013 (for each of which a BAR was filed), Element incurred one-time acquisition costs that were required to be expensed through the income statement under IFRS. These acquisition costs were $23.2 million and $32.5 million for the year ended December 31, 2012 and the nine month period ended September 30, 2013, respectively.
The application of the “profit or loss test”, based on the available financial information for the Acquired Portfolio discussed above and described in the GE Assets Prospectus Disclosure, results in the Acquisition being a “significant acquisition” pursuant to Item 8.3 of NI 51-102. However, this is the only “significant acquisition” test that leads to such conclusion. The application of the “profit or loss test” to the Acquisition leads to an anomalous result in that the significance of the Acquired Portfolio is exaggerated in proportion to its actual significance to the Filer from a practical, commercial, business, operational or financial perspective and in comparison to the results of the “asset test” under Section 8.3 of NI 51-102.
As described in the Filer’s final short form base shelf prospectus dated December 6, 2013, the Filer does not consider the acquisition of the Acquired Portfolio to be a “significant acquisition” from a commercial, business, practical or financial perspective.
The Acquired Portfolio consists of 59 individual leases or loan arrangements in total (secured by helicopters.) The Acquisition represents a small fraction of the over 10,000 leases or loans outstanding in Element’s overall finance asset portfolio.
Based on Element’s new business organization volume in 2013 (including contributions from acquisitions), Element’s monthly average new finance asset business was approximately $200 million per month, further demonstrating that the Acquisition is insignificant as it represents just over one month of Element’s core origination volume of new finance assets.
The Acquired Portfolio does not require a significant amount of operational or administrative personnel focus, nor will a significant amount of the Filer’s operational budget be assigned to or required for the Acquired Portfolio.
Absent this relief, the Filer was required to file a BAR in respect of the Acquisition on or before March 4, 2014.
Decision
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 Exemption Sought is granted.
“Sonny Randhawa”
Sonny Randhawa, Manager Corporate Finance Ontario Securities Commission