4000 - Advisory Opinions
Acquisition or Retention of Corporate Debt Securities Not of Investment Grade by Savings Association
December 21, 1989
Douglas H. Jones, Deputy General Counsel
By letter dated October 4, 1989, you inquired as to the ability of your client, *** *** *** to participate in an exchange offer or other restructuring of corporate debt securities that are not of investment grade which were acquired by *** prior to August 9, 1989. Subject to a transition rule, *** is prohibited from acquiring or retaining such securities under Section 28(d) of the Federal Deposit Insurance Act ("FDI Act," 12 U.S.C. 1831(e)) which was added to the FDI Act by section 222(d) of the Financial Institution Reform, Recovery and Enforcement Act of 1989, Pub. L. No. 101-73, Section 222(d), 103 Stat. 183, 269 (1989).
We wish to address two specific issues arising out of your inquiry. First, whether, and under what conditions, an association may participate in an exchange offer or other restructuring of noninvestment grade corporate debt securities without violating section 28(d) of the FDI Act, and second, what is the overall obligation of an association under section 28(d) with respect to its debt securities portfolio.
On December 12, 1989, the Board of Directors of the FDIC approved the issuance of an interim rule (section 303.13) to implement section 28(d). The interim rule requires that state or federal savings associations holding securities that were not of investment grade (in the top four rating categories) at the time of acquisition, so called "junk bonds", file with the FDIC regional director for supervision in the region in which the association is located an application for permission to retain the bonds until they can be divested and a plan to divest the bonds as quickly as prudently possible but in any event no later than July 1, 1994. The application must be filed within 30 days from the effective date of the regulation (i.e., 30 days from the date the regulation appears in the Federal Register). The interim rule sets forth what must be included in the application and requires that the association request the FDIC's permission to accomplish divestiture in accordance with the plan. During the divestiture period, the FDIC may impose such conditions and requirements as it deems appropriate in its sole discretion with respect to the divestiture of the debt securities. A savings association is not precluded from divesting its junk bonds while awaiting the FDIC's review of its plan. As it is the intent of the statute to see that savings associations divest the junk bonds as quickly as prudently possible, it would be counter-productive for an association to not avail itself of an opportunity to divest if one were to arise before the FDIC can respond to its application.
With respect to whether participation in an exchange offer or other restructuring is permissible under section 28(d), we note that an exchange offer generally involves substituting securities with different terms for outstanding debt securities. It is our view that an association may participate in an exchange or other restructuring transaction involving a less than investment grade corporate debt held in its portfolio without violating the prohibition in section 28(d) on the acquisition of such securities after August 9, 1989 provided that (i) the existing securities were lawfully acquired prior to the enactment of FIRREA, (ii) the association determines in good faith the participation in the restructuring or exchange will protect or enhance the value or collectibility of the asset or mitigate loss in respect of the asset, (iii) any exchange offer only involves debt securities of the same obligor (or a successor), and (iv) the association is not advancing or investing additional funds as part of the exchange or other restructuring transaction. Under all circumstances, however, the participation in the exchange or restructuring transaction must be consistent with the statutory obligations of section 28(d) and the association's plan of divestiture. Although we are not adopting the position that the FDIC must approve an exchange or restructuring transaction, associations that do enter into such transactions should inform the regional office that a transaction has occurred if the transaction will materially affect the association's ability to meet its divestiture plan.
Should you have additional issues which you wish to discuss, please contact Arthur Beamon, Associate General Counsel, or myself.