Chilean regulator downgrades Irish Ucits funds

The Chilean pensions regulator, Comisión Clasificadora de Riesgo (CCR), has downgraded Ucits funds domiciled in Ireland for general investment, demoting them to restricted investment status.

This downgrade will affect over 100 Ucits funds registered in Ireland by leading asset managers including Skandia, Baring, Invesco, Legg Mason, BNY Mellon, Natixis, Pimco and Neuberger Berman. An estimated $6 billion of Chilean pension funds’ assets are currently invested in Irish Ucits funds.

The CCR is responsible for establishing approval procedures for and approving shares of investment funds for Chilean pension fund investment.

According to a report issued by law firm Dechert, Irish Ucits now fail to comply with Article 15 of Decision No. 32 of the CCR. The article says that the rating of the country in which the fund, its manager or holding company are registered should be at least category A. Category A is defined as: S&P – A (+,-); Fitch – A (+,-); and Moody’s A (1, 2, 3) with the risk rating being assigned by at least two of the three rating agencies.

In July 2011, Ireland was assigned a junk status rating by Moody’s, although it maintained its BBB+ rating from S&P and Fitch’s. Moody’s downgrade was the probable tipping point for the CCR, leading its Administrative Secretariat to issue a decision disapproving Irish funds that was published in the Chilean official journal on September 1.


The Chilean decision to link the stability of a Ucits fund to the credit rating of the country it is registered in is “misplaced,” said Peter Astleford (pictured above), one of Dechert’s UK-based investment management partners. “There is no correlation between the credit rating and the safety of the funds or assets held under Irish law,” Astleford asserted.

According to the Chilean Counsel, the disapproval is not a complete prohibition on investment but will result in Irish funds being qualified as restricted investments rather than general investments.

Chilean pension funds can invest in restricted investments, but are subject to stricter investment limits. The Irish Funds Industry Association (IFIA) has received indications that Chilean pension funds should not need to redeem from Irish funds, but Astleford is concerned this downgrade could have a twofold impact on the Irish funds industry.

Chilean pension funds will have to reduce investments in Irish Ucits if their current allocations are above the threshold permitted for restricted investments. Chilean pension trustees may “assume the regulators have got this right” and interpret this change as a “warning signal” about the safety of Irish Ucits, Astelford said. This could undermine overall confidence in Irish Ucits.

Secondly, fund managers considering where to domicile their Ucits will want to do so in the most advantageous jurisdiction possible. “If Irish Ucits funds suddenly don’t tick all of the boxes, [managers] may rethink where to domicile their funds,” Astleford added.

It is in the interests of Chilean pension funds to reassess this regulation, Astleford noted, as it limits their Ucits investment universe significantly. However, changing this regulation is unlikely to happen without high level political intervention, he said.

Astleford believes the reasoning behind the law stems from many South American countries’ past economic difficulties and historical defaulting on government debt.

In the second half of 2010 Ireland’s credit rating was downgraded several times due to sovereign debt issues. This is what triggered the CCR’s concerns about breaching Article 15 of Decision No. 32.

The IFIA, with the assistance of the Irish Government and the regional Irish Ambassador in Latin America, provided information and assurances to the CCR as to the separation between Irish sovereign debt issues and the international investment funds industry in Ireland.

They also highlighted the international nature of Ucits which are governed by a European legislative framework. The CCR agreed not to disapprove Irish funds but put them on a watch list in October 2010.

Dechert Financial Services Group is exploring the alternative options for Irish Ucits potentially affected by this decision, including the options for replicating or merging Irish portfolios into existing umbrellas or sub-funds domiciled in Luxembourg, the UK or the United States.

Chilean pension funds can also invest in Ucits funds domiciled in France, Luxembourg and the UK. Although these jurisdictions should not face similar risks in terms of potential ratings downgrades, they will face “exactly the same treatment if debt falls,” Astleford cautioned.

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