Brown & Wood LLP , (Feb. 07, 1997)

INQUIRY LETTER

BROWN & WOOD LLP

ONE WORLD TRADE CENTER

NEW YORK, N.Y. 10048-0557

TELEPHONE(212) 839-5300

February 05, 1997

BY FEDERAL EXPRESS

Martin P. Dunn, Esq., Chief Counsel

Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Dear Mr. Dunn:

The staff of the Division of Corporation Finance (the "Staff") of the Securities and Exchange Commission (the "Commission") has in the past permitted the type of exchange offer transaction described in Exxon Capital Holdings Corporation (available May 13, 1988) ("Exxon Capital Letter") (an "Exchange Offer") to be used in connection with (i) investment grade non-convertible preferred stock, (ii) non-investment grade or unrated non-convertible preferred stock that is exchangeable into debt securities, (iii) broker-remarketed or auction preferred stock, (iv) investment or non-investment grade non-convertible debt securities, (v) non-convertible debt securities that are not rated and (vi) equity securities of non-reporting foreign private issuers.

The purpose of this letter is to request confirmation that (1) holders of privately placed securities known as "Capital Securities" (the "Initial Capital Securities") that have the characteristics more specifically described herein (other than (a) a broker-dealer who purchases Initial Capital Securities directly from the issuer for resale pursuant to Rule 144A or another available exemption under the Securities Act of 1933, as amended (the "Securities Act"), (b) a person participating in the distribution of the Initial Capital Securities or (c) a person who is an affiliate of the issuer) who exchange such securities in an Exchange Offer registered under the Securities Act as further described herein for substantially identical securities (the "Exchange Capital Securities") and then resell such Exchange Capital Securities will be viewed by the Staff no differently than non-affiliated purchasers of registered securities who purchase such securities in a registered primary offering of securities and, after completion of such registered offering, resell the securities and (2) the resale of the Exchange Capital Securities may be effected without any further registration under the Securities Act or the delivery of a prospectus.

The Transactions

Typically, holders acquire Initial Capital Securities in the following manner: (i) such holders purchase Initial Capital Securities from the issuer directly or through an agent of the issuer in a private placement pursuant to Section 4(2) under the Securities Act or another available exemption from the registration requirements of the Securities Act; or (ii) pursuant to Section 4(2) and Rule 144A under the Securities Act, the issuer enters into a contract for the sale of the Initial Capital Securities with a broker-dealer (the "Initial Purchaser") who then resells such Initial Capital Securities to certain "institutional accredited investors" (as described in Rule 501(a)(1), (2), (3) and (7) of Regulation D) or "qualified institutional buyers" (as defined in Rule 144A). These transactions are exempt from the registration requirements of the Securities Act pursuant to Section 4(2) and/or Rule 144A, as the case may be. The institutional accredited investors and qualified institutional buyers then may resell such Initial Capital Securities pursuant to Rule 144A or in reliance on another available exemption from the registration requirements of the Securities Act.

In connection with the sale of the Initial Capital Securities to the Initial Purchasers, the Trust (as defined herein) and the Parent (as defined herein) will enter into a registration rights agreement with the Initial Purchasers pursuant to which the Trust and the Parent agree either (a) to register on a registration statement on Form S-4 securities (the "Exchange Capital Securities") which are substantially identical to the Initial Capital Securities and exchange the Initial Capital Securities for the Exchange Capital Securities pursuant to an Exchange Offer or (b) in the event the Exchange Offer is not permitted and in certain other circumstances, to file a shelf registration statement on Form S-3 to register the resale of the Initial Capital Securities and to maintain such shelf registration statement effective for three years. Although the shelf registration procedure described in clause (b) above offers potential liquidity to buyers of privately placed securities, such securities remain restricted securities until they are sold pursuant to an effective shelf registration statement -- which has the effect of limiting the potential group of institutional investors who for legal or policy reasons are unable to purchase restricted securities even with registration rights. If the registration rights granted to investors can be fulfilled by the exchange offer procedure described in clause (a) above (i.e., by registering the Exchange Capital Securities on a registration statement on Form S-4 and then exchanging such securities for the Initial Capital Securities), there will be a broader institutional market and more liquidity for the privately placed securities resulting in significant cost savings to a Trust and Parent. Such cost savings will result from the increased demand from a broader market of institutional investors, as well as from the elimination, in many cases, of the obligation to maintain an "evergreen" shelf registration statement.

The Securities

In the past several years, investors have witnessed the development of a myriad of new structures for fixed income securities. In the last four months, a number of Trusts and Parents have issued Capital Securities. Capital Securities are similar in structure to trust originated preferred securities ("TOPrS"_s?), monthly income preferred securities ("MIPS"_s?), quarterly income preferred securities ("QUIPS"_s?) and quarterly income capital securities ("QUICS"_s? and together with TOPrS, MIPS and QUIPS, the "Preferred Securities"). ¹ While there is not a "typical" Capital Securities structure, as the details of particular transactions have often differed to accommodate issuer or investor needs, generally a newly formed finance subsidiary is organized by a holding company for one or more banks or other financial institutions or other corporate entities (the "Parent") as a statutory business trust (the "Trust"). The Trust issued beneficial interests in its assets in the form of Capital Securities and common securities, and the Parent fully and unconditionally guarantees payments in respect of such securities. All of the common securities of the Trust are purchased by the Parent. The Trust then issues Capital Securities and purchases junior subordinated debentures (or equivalent security) (the "Junior Subordinated Debentures") from the Parent with the proceeds from the sale of the Capital Securities and the common securities. The Trust exists for the sole purpose of issuing the Capital Securities to investors and the common securities to the Parent and investing the proceeds thereof in an equivalent amount of Junior Subordinated Debentures issued by the Parent to the Trust.

While Capital Securities are similar in structure to retail Preferred Securities, there are significant differences between the two. We have been advised that Capital Securities (i) are more attractive to qualified institutional buyers and institutional accredited investors and, accordingly, have been sold exclusively to such institutions rather than "retail" investors, (ii) accordingly, have been sold exclusively to such institutions rather than "retail" investors, (ii) have a liquidation value of $1,000 per Capital Security (whether sold in Rule 144A-eligible private placements or in registered public offerings) rather than a liquidation value of $100, $50 or, more commonly, $25 per security as is the case with retail Preferred Securities, (iii) have not been listed on a national securities exchange or quoted on an inter-dealer quotation system as is the case with retail Preferred Securities, (iv) pay distributions semi-annually rather than monthly or quarterly as is the case with retail Preferred Securities, (v) may provide for a redemption premium, not applicable to retail Preferred Securities, upon the occurrence of certain specified events and (vi) have been assigned a debt CUSIP number rather than an equity CUSIP number as is the case with retail Preferred Securities.

As the Staff is aware, Capital Securities are considered taxable corporate securities that have characteristics similar to both corporate bonds and preferred stock. From the perspective of the Parent, Capital Securities are afforded debt status for U.S. federal income tax purposes and are treated as a separate line item for U.S. generally accepted accounting purposes, are considered Tier 1 capital by the Board of Governors of the Federal Reserve and provide financial flexibility for rating agency purposes.

Supplemental Disclosure and Representations

In accordance with existing Staff no-action letters, prior to effectiveness of a registration statement, the Trust and the Parent will provide a supplemental letter to the Staff (i) stating that the Trust and the Parent are registering the Exchange Offer in reliance on the Staff position enunciated in the Exxon Capital Letter, Morgan Stanley & Co. Incorporated (available June 5, 1991) (the "Morgan Stanley Letter"), K-III Communications Corporation (available May 14, 1993) (the "K-III Communications Letter"), Shearman & Sterling (available July 2, 1993) (the, Shearman & Sterling Letter") and this letter and (ii) containing a representation that the Trust and the Parent have not entered into any arrangement or understanding with any person (including any broker-dealer) to distribute the Exchange Capital Securities to be received in the Exchange Offer and, to the best of the Trust and the Parents information and belief, each person (including any broker-dealer) participating in the Exchange Offer will acquire the Exchange Capital Securities in the ordinary course of business and with no arrangement or understanding with any person to participate in a distribution of Exchange Capital Securities to be received in the Exchange Offer. In addition, the Trust and the Parent will include in the supplemental letter to the Staff the additional representations required by the Shearman & Sterling Letter.

Similar to the Exxon Capital Letter, the Morgan Stanley Letter, the K-III Communications Letter, the Shearman & Sterling Letter and other letters addressing this issue, the Trust and the Parent will make each person (including any broker-dealer) tendering Initial Capital Securities pursuant to the Exchange Offer aware (through the Exchange Offer prospectus or otherwise) that, if the Exchange Offer is being registered for the purpose of secondary resales, any holder of Initial Capital Securities using an Exchange Offer to participate in a distribution of the Exchange Capital Securities to be acquired in an Exchange Offer (a) could not rely on the Staff position enunciated in the Exxon Capital Letter, the Morgan Stanley Letter, the K-III Communications Letter, the Shearman & Sterling Letter or similar letters and (b) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. The Trust and the Parent will acknowledge that such a secondary resale transaction must be made by delivery of a prospectus containing the selling securityholder information required by Item 507 of Registration S-K.

The Trust and the Parent will also include in the letter of transmittal (or similar documentation to be executed by each person participating in an Exchange Offer) disclosure that, by accepting the Exchange Offer, each holder (including any broker-dealer) of Initial Capital Securities represents to the Trust and the Parent that it is not engaged in, and does not intend to engage in, a distribution of the Exchange Capital Securities. If a broker-dealer holds Initial Capital Securities for its own account as a result of market-making activities or other trading activities, such broker-dealer will acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of Exchange Capital Securities received in exchange for such Initial Capital Securities pursuant to the Exchange Offer. The letter of transmittal or similar documentation may also include a statement to the effect that, by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Trust and the Parent will commence an Exchange Offer for the Initial Capital Securities only after a registration statement on Form S-4 has been declared effective by the Commission. Each Exchange Offer will comply with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any applicable rules and regulations thereunder. Accordingly, any Trust and Parent that issues Capital Securities in a private placement will not be required to maintain an "evergreen" registration statement.

In order for the Trust and the Parent to be permitted to make an Exchange Offer for Initial Capital Securities in accordance with the terms of this letter, the Capital Securities will contain the following characteristics and/or attributes: (i) a minimum liquidation value of $1,000 per Capital Security, (ii) no listing on a national securities exchange or quotation on an inter-dealer quotation service after the Exchange Offer, (iii) distributions payable no more frequently than semi-annually, (iv) a redemption premium upon the occurrence of certain specified events, (v) a debt CUSIP number, (vi) mandatory redemption upon the earlier of (a) the redemption of the Junior Subordinated Debentures or (b) the stated maturity of the Junior Subordinated Debentures, which Junior Subordinated Debentures will have a stated maturity (not subject to extension) of not more than 50 years from the date of issuance and (vii) issuance pursuant to a Declaration of Trust or Trust Agreement that is qualified under the Trust Indenture Act of 1939, as amended. In addition to the above conditions, in those instances where the Exchange Capital Securities have not been rated or are not rated investment grade by a nationally recognized statistical rating organization (an "NRSRO"), the Exchange Capital Securities will either be (a) accounted for as debt on the balance sheet of the Parent or (b) only transferable in denominations of $100,000 or any integral multiple of $1,000 in excess thereof.

Conclusion

We believe that the Staffs position set forth in the Exxon Capital Letter, the Morgan Stanley Letter, the K-III Communications Letter and the Shearman & Sterling Letter should be equally applicable to the Capital Securities described herein. The Capital Securities are more analogous to debt than preferred stock or common stock and, in fact, are generally exchangeable at any time at the option of the Trust and the Parent into the Junior Subordinated Debentures.

Accordingly, we would appreciate the Staff confirming our view that holders of Initial Capital Securities that have the characteristics and/or attributes described above (other than (a) a broker-dealer who purchases Initial Capital Securities directly from the Trust for resale pursuant to Rule 144A or another available exemption under the Securities Act, (b) a person participating in the distribution of the Initial Capital Securities or (c) a person who is an affiliate of the issuer) who exchange such securities in an Exchange Offer (in the manner described in this letter and subject to the conditions contained herein) for Exchange Capital Securities and then resell such Exchange Capital Securities will be viewed by the Staff no differently than resales by a non-affiliated purchaser after completion of any registered primary offering of securities and, therefore, that resales of Exchange Capital Securities acquired by a holder in an Exchange Offer may be effected without any further registration under the Securities Act or the delivery of a prospectus.

We would appreciate your prompt response to our request since a number of Trusts and Parents have filed, or shortly will be filing with the Commission, registration statements on Form S-4 to register the Exchange Offers. If the Trusts and the Parents that have issued Initial Capital Securities are not permitted to rely on the previously announced position of the Staff as expressed in the Exxon Capital Letter, the Morgan Stanley Letter, the K-III Communications Letter and the Shearman & Sterling Letter, many of them may incur interest rate penalties or will be required to file "evergreen" shelf registration statements pursuant to registration rights agreements. As noted above, the filing of an "evergreen" shelf registration statement is a procedure that is more burdensome and costly to the Parent.

If the Staff is unable to provide the requested confirmation, we respectfully request an opportunity to discuss this matter with you prior to your issuance of any written response.

In accordance with Securities Act Release No. 6269, enclosed are seven copies of this letter.

Should you have any questions or require any further information, please call the undersigned at (212) 839-8632, Norman D. Slonaker at (212) 839-5356 or Edward F. Petrosky at (212) 839-5455.

Very truly yours,

John C. Maguire

cc: Abigail Arms, Esq.

Larry M. Spirgel, Esq.

Securities and Exchange Commission,

Division of Corporation Finance

Norman D. Slonaker, Esq.

Edward F. Petrosky, Esq.

Brown & Wood LLP

STAFF REPLY LETTER

February 7, 1997

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF CORPORATION FINANCE

Re: Brown & Wood LLP

Incoming letter dated February 5, 1997

Based on the facts presented, it is the Divisions view that the described holders of privately placed Capital Securities who exchange such securities in an Exchange Offer (as defined in your letter) registered under the Securities Act of 1933 for substantially similar securities ("Exchange Capital Securities") may resell such Exchange Capital Securities without compliance with the registration and delivery requirements of the Securities Act of 1933, provided that such holder acquires the Exchange Capital Securities in the ordinary course of its business and has no arrangement or understanding with any person to participate in the distribution of the Exchange Capital Securities.

In reaching this position, we have particularly noted (1) the described characteristics of the Capital Securities, and (2) the activities to be taken in connection with the Exchange Offer that are set forth in your letter under the caption "Supplemental Disclosure and Representations."

Because these positions are based upon the representations made to the Division in your letter, it should be noted that any different facts might required different conclusions.

Sincerely,

Larry M. Spirgel

Special Counsel

SEC_CODE_REF_0090001192884