What is a Term Finance Certificate (TFC)
· A corporate debt instrument issued by companies to generate short and medium-term funds.
· Corporate TFCs offer institutional investors, in particular retirement funds and insurance companies, with a viable high yield alternative to the National Saving Schemes (NSS) and bank deposits.
· TFCs are also an essential complement to risk free, lower yielding government bonds such as PIB.
· TFCs can be issued both as a fixed or floating rate instrument and may have a call or put option.
TFC Rating
· A TFC must be rated before issuance.
· The rating reflects the credit risk of The TFC, i.e. the issuer’s ability and commitment to repay scheduled TFC payments.
· Currently two rating agencies PACRA and JCR-VIS are operating in Pakistan.
Income/Return structure of TFC
· Like bonds, TFCs are structured to provide regular income in the form of coupons.
· Unlike a generic bond, a TFCs principal may gradually be redeemed over the tenor of the instrument.
· TFCs are exempt from Capital gain tax. However, coupons payments are subject to income tax.
Salient features of TFC
· Redeemable capital
· Monitored by Trustee
· Return on investment may be fixed or floating
