What is a Term Finance Certificate?

what is a term finance certificate

If you’re looking for ways to invest your money, you may have come across the term “Term Finance Certificate” or TFC. A TFC is a debt instrument that is issued by a company or a financial institution to raise funds for a specific period of time. In return for investing in a TFC, the investor receives a fixed rate of interest.

TFCs are similar to bonds, but they are issued for shorter periods of time and are usually offered by smaller companies or financial institutions. They are a popular investment option for those who are looking for a fixed income stream and want to diversify their portfolio. 

Investing in TFCs can be a good option for those who want to earn a fixed rate of return without taking on too much risk. In the following paragraphs, we’ll take a closer look at what TFCs are, how they work, and what you need to consider before investing in them.

Definition of Term Finance Certificate

A certificate with "Term Finance Certificate" written in bold letters, surrounded by financial symbols and graphs

If you are looking for a way to invest your money, you may have come across the term “Term Finance Certificate” or TFC. So, what exactly is a TFC?

A TFC is a type of debt security that is issued by corporations or financial institutions to raise long-term funds from investors. It is similar to a bond, but with some key differences. Unlike bonds, TFCs are not traded on stock exchanges and are not backed by any collateral. Instead, they are backed by the issuer’s creditworthiness.

TFCs have a fixed maturity period, typically ranging from one to ten years, and pay a fixed rate of return, known as the coupon rate. At the end of the maturity period, the investor receives the principal amount along with the final coupon payment.

However, some issuers may offer smaller denominations to attract a wider range of investors. Overall, TFCs can be a good investment option for those looking for long-term, fixed-income securities. However, as with any investment, it is important to do your research and understand the risks involved before investing.

Types of Term Finance Certificates

Term Finance Certificates (TFCs) are a popular investment option in Pakistan. They provide a fixed return to investors over a specific period of time. There are two main types of TFCs: secured and unsecured.

Secured Term Finance Certificates

Secured TFCs are backed by collateral, such as property or assets. This means that if the issuer defaults on the payment, the investor can claim the collateral. Secured TFCs are considered less risky than unsecured TFCs.

Unsecured Term Finance Certificates

Unsecured TFCs, on the other hand, are not backed by collateral. They are considered riskier than secured TFCs, as there is no guarantee that the issuer will be able to make the payments. However, unsecured TFCs generally offer higher returns than secured TFCs.

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Key Features of Term Finance Certificates

Interest Rates

The interest rates on term finance certificates are fixed and predetermined at the time of issuance. This means that investors know exactly how much return they will receive on their investment. The interest rates offered on term finance certificates are usually higher than those offered on traditional fixed deposits, making them an attractive investment option for those looking for higher returns.

Maturity Period

Term finance certificates have a fixed maturity period, which can range from a few months to several years. This means that investors know exactly when they will receive their principal investment amount back. The maturity period of term finance certificates can be tailored to suit the needs of investors, making them a flexible investment option.

Credit Rating

Term finance certificates are issued by reputable financial institutions and are backed by their creditworthiness. This means that investors can be confident that their investment is safe and secure. The credit rating of the issuing institution is an important factor to consider when investing in term finance certificates.

In summary, term finance certificates are a fixed income investment option that offer attractive interest rates, a fixed maturity period, and are backed by the creditworthiness of reputable financial institutions. If you are looking for a safe and secure investment option with higher returns than traditional fixed deposits, term finance certificates may be a good option for you.

Benefits of Investing in Term Finance Certificates

Term Finance Certificates (TFCs) are a popular investment option for those looking for a fixed income with a relatively low level of risk. Here are some benefits of investing in TFCs:

Fixed Income

TFCs provide a fixed income to investors, which means that you will receive a regular payment at a fixed rate of return. This can be particularly attractive to investors who are looking for a predictable source of income, as it can help to offset the volatility of other investments in your portfolio.

Diversification

Investing in TFCs can help to diversify your investment portfolio, as they offer a different risk and return profile compared to other types of investments, such as stocks or mutual funds. This can help to reduce the overall risk of your portfolio, as well as potentially increase your returns over the long term.

In addition to these benefits, TFCs are also relatively easy to buy and sell, which makes them a convenient investment option for many investors.

Issuance Process of Term Finance Certificates

Term Finance Certificates (TFCs) are a popular financing instrument in Pakistan that are issued by companies to raise long-term financing from the capital market. The issuance process of TFCs involves several steps, which are outlined below.

Regulatory Approval

Before issuing TFCs, companies must obtain approval from the Securities and Exchange Commission of Pakistan (SECP). The SECP is responsible for regulating the issuance of TFCs and ensuring that the companies comply with the relevant rules and regulations.

Companies must submit an application to the SECP, which includes details about the proposed issuance, such as the size of the issue, the coupon rate, and the maturity date. The SECP reviews the application and may request additional information or clarification before granting approval.

Pricing and Subscription

Once the SECP approves the issuance of TFCs, the company must determine the pricing and subscription terms. The pricing of TFCs is based on the prevailing market conditions and the creditworthiness of the issuing company.

The company may engage the services of an investment bank or brokerage firm to help with the pricing and subscription process. The investment bank or brokerage firm may conduct a roadshow to promote the TFCs to potential investors and gauge their interest.

Investors can subscribe to the TFCs by submitting an application form and paying the subscription amount. The company may set a minimum subscription amount and may offer different tranches of TFCs with varying coupon rates and maturities.

Overall, the issuance process of TFCs is a well-regulated and transparent process that allows companies to raise long-term financing from the capital market.

Risks Associated with Term Finance Certificates

Credit Risk

One of the main risks associated with term finance certificates is credit risk. This refers to the risk of default by the issuer of the certificate. If the issuer is unable to repay the principal and interest on the certificate, then the investor may suffer a loss. To mitigate this risk, investors should carefully evaluate the creditworthiness of the issuer before investing in their certificates.

Market Risk

Another risk associated with term finance certificates is market risk. This refers to the risk of fluctuations in the value of the certificate due to changes in market conditions. For example, if interest rates rise, the value of the certificate may decrease, and vice versa. To mitigate this risk, investors should diversify their portfolio and invest in certificates with varying maturities.

Liquidity Risk

Lastly, investors in term finance certificates face liquidity risk. This refers to the risk of not being able to sell the certificate when needed due to a lack of buyers in the market. To mitigate this risk, investors should carefully consider the liquidity of the certificate before investing and ensure that they have sufficient funds to hold the certificate until maturity.

Overall, while term finance certificates can provide attractive returns, investors should be aware of the risks involved and carefully evaluate the creditworthiness of the issuer, diversify their portfolio, and consider the liquidity of the certificate before investing.

Term Finance Certificates vs. Bonds

Legal Structure

However, TFCs and bonds have different legal structures. Bonds are typically issued under a trust deed, which is a legal document that outlines the terms and conditions of the bond issue. The trust deed also provides security to bondholders in case of default by the issuer. 

On the other hand, TFCs are issued under a Musharaka Agreement, which is a Shariah-compliant partnership agreement between the issuer and the investors. Under this agreement, the issuer and investors share profits and losses in a pre-defined ratio.

Market Accessibility

Another key difference between TFCs and bonds is their market accessibility. Bonds are widely traded in the secondary market, which means that investors can easily buy and sell bonds on stock exchanges or over-the-counter markets. The secondary market for bonds is highly liquid, which means that investors can easily find buyers or sellers for their bonds. In contrast, TFCs are not as widely traded in the secondary market as bonds. 

This is because TFCs are Shariah-compliant and are therefore only accessible to Islamic investors. However, the market for TFCs is growing, and there are now several stock exchanges that offer trading in TFCs.

In summary, TFCs and bonds are both debt instruments that are used to raise funds. However, they differ in their legal structure and market accessibility. Bonds are typically issued under a trust deed and are widely traded in the secondary market, while TFCs are issued under a Musharaka Agreement and are primarily accessible to Islamic investors.

Regulatory Framework Governing Term Finance 

Certificates

Governing Bodies

Term Finance Certificates (TFCs) are governed by the Securities and Exchange Commission of Pakistan (SECP) under the Securities Act, 2015. The SECP regulates the issuance, trading, and redemption of TFCs to ensure that they comply with the applicable laws and regulations. In addition, the State Bank of Pakistan (SBP) also regulates the issuance of TFCs by financial institutions under the Banking Companies Ordinance, 1962.

Compliance Requirements

The SECP has laid down a set of compliance requirements that issuers of TFCs must fulfill. These requirements include the submission of a prospectus, which contains all the relevant information about the TFCs being offered, such as the terms and conditions, the risks involved, and the financial statements of the issuer. The prospectus must be approved by the SECP before the TFCs can be offered to the public.

Issuers of TFCs are also required to maintain a sinking fund, which is used to repay the principal amount of the TFCs at maturity. The sinking fund must be maintained by depositing a certain percentage of the TFCs’ face value into a separate account every year until maturity.

In addition, the SECP requires issuers of TFCs to appoint a trustee to act on behalf of the TFC holders. The trustee is responsible for safeguarding the interests of the TFC holders and ensuring that the issuer complies with the terms and conditions of the TFCs.

Overall, the regulatory framework governing TFCs in Pakistan is designed to protect the interests of investors and ensure that issuers comply with the applicable laws and regulations.

Global Practices in Term Finance Certificates

Term Finance Certificates (TFCs) have gained popularity globally due to their flexibility and ease of issuance. In Pakistan, TFCs are issued by companies to raise long-term financing from the capital market. However, TFCs are not limited to Pakistan and are widely used in other countries as well.

In Malaysia, TFCs are known as Islamic Medium Term Notes (IMTNs) and are issued by companies to raise funds in compliance with Shariah principles. The IMTNs are issued for a period of 3 to 7 years and are listed on Bursa Malaysia.

In the United Arab Emirates (UAE), TFCs are known as Sukuk Al Mudarabah and are issued by companies to raise funds from the Islamic capital market. The Sukuk Al Mudarabah are issued for a period of 3 to 5 years and are listed on the Dubai Financial Market.

In the United Kingdom (UK), TFCs are known as Retail Bonds and are issued by companies to raise funds from retail investors. The Retail Bonds are issued for a period of 5 to 10 years and are listed on the London Stock Exchange.

In the United States (US), TFCs are known as Corporate Bonds and are issued by companies to raise funds from institutional investors. The Corporate Bonds are issued for a period of 10 to 30 years and are listed on the New York Stock Exchange.

Overall, TFCs are a popular financing option for companies globally due to their flexibility and ease of issuance. Companies can tailor the terms of the TFCs to meet their specific financing needs and can issue them in compliance with local regulations.

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Case Studies of Term Finance Certificate Issuances

If you are interested in investing in term finance certificates, it may be helpful to look at some case studies of issuances in the past. Here are a few examples:

Case Study 1: ABC Company

ABC Company issued a term finance certificate with a face value of $1 million and a tenor of 3 years. The coupon rate was fixed at 5% per annum. The certificate was rated AAA by a reputable credit rating agency.

Investors were attracted to the certificate due to the high credit rating of the issuer and the attractive coupon rate. The certificate was oversubscribed, with demand exceeding supply by 2 times.

Case Study 2: XYZ Corporation

XYZ Corporation issued a term finance certificate with a face value of $500,000 and a tenor of 5 years. The coupon rate was fixed at 4.5% per annum. The certificate was rated A+ by a reputable credit rating agency.

Investors were attracted to the certificate due to the moderate credit rating of the issuer and the attractive coupon rate. The certificate was fully subscribed, with demand equaling supply.

Case Study 3: PQR Industries

PQR Industries issued a term finance certificate with a face value of $2 million and a tenor of 2 years. The coupon rate was fixed at 6% per annum. The certificate was rated BBB+ by a reputable credit rating agency.

Investors were attracted to the certificate due to the high coupon rate, despite the moderate credit rating of the issuer. The certificate was oversubscribed, with demand exceeding supply by 1.5 times.

These case studies demonstrate the various factors that can influence the demand and subscription of term finance certificates, such as credit rating, coupon rate, tenor, and face value. It is important to do your own research and due diligence before investing in any financial instrument.

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