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4000 - Advisory Opinions

Conditions Under Which a Savings Association May Participate in an Exchange or Other Restructuring of Noninvestment Grade Corporate Debt Securities Under 28(d) of the FDI Act


September 7, 1990

Douglas H. Jones, Senior Deputy General Counsel

By letter dated August 23, 1990, you requested my confirmation of your view that a savings association may, consistent with section 28(d) of the Federal Deposit Insurance Act ("FDI Act"), participate in a proposed recapitalization by your client *** , the issuer of noninvestment grade debt securities held by the association. This letter responds to your request.

In your letter, you describe the proposed *** recapitalization as an exchange-type offer in which a savings association currently holding noninvestment grade debt securities issued by *** would receive cash for such securities in exchange for its commitment to reinvest a portion of such cash in newly issued *** noninvestment grade debt securities. In addition to receiving cash, you indicate that the association would also receive warrants as an inducement to participate in the recapitalization. You have further indicated that these respective transactions would take place, in effect, simultaneously.

In connection with your request, you refer to my December 21, 1989, letter to *** ("*** letter"), which stated my opinion as to the conditions under which a savings association may participate in an exchange or other restructuring of noninvestment grade corporate debt securities held in its portfolio without violating the prohibitions in section 28(d) on the acquisition of such securities after August 9, 1989 (the date of enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), which added section 28(d) to the FDI Act). Those conditions were that:

(i)  the existing securities were lawfully acquired prior to the enactment of FIRREA;

(ii)  the association determines in good faith that 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.

The *** letter further stated that under all circumstances, 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 filed with the FDIC pursuant to the interim regulation implementing section 28(d), 12 C.F.R. 303.13 (54 Fed. Reg. 53539 (December 29, 1989)).

In your letter, you state that the proposed structure for the *** recapitalization is "almost identical" to the exchange offer described in the *** letter, and request confirmation that the *** proposal "is within the parameters set forth in [the *** letter] and section 28(d) of the FDI Act".

It is my understanding that the specific issues you are in effect asking me to address are whether a savings association may participate in the proposed *** recapitalization under the same conditions as those identified in the *** letter, and, if so, whether elements (iii) and (iv) of those conditions can be satisfied where, as here, the participating savings association receives cash and warrants for the securities it currently holds in exchange for its commitment to reinvest a portion of the cash in the newly issued securities.

Based on the information provided in your letter, it is my opinion that the proposed *** recapitalization arrangement is "an exchange or other restructuring transaction" for purpose of application of the conditions stated in the *** letter. It is also my opinion that the association's use of a portion of the cash received from its sale of the existing securities to purchase the new securities pursuant to a commitment as described in your letter does not amount to "advancing or investing additional funds" for purposes of element (iv).

With respect to element (iii), you have raised the issue of whether the inclusion of warrants (which you described in a telephone conversation with a member of my staff as warrants to purchase *** common stock) as a form of payment in the sale by the association of the existing securities disqualified the *** proposal under the conditions. Since the word "only" in element (iii) was intended primarily to apply to the obligor rather than to the type of obligation involved, the inclusion of the warrants in the *** proposal does not defeat satisfaction of element (iii).

Please be aware that this letter states no conclusions or findings other than the limited opinions expressly stated above and should not be read as in any way approving of or consenting to participation by savings associations in the proposed *** recapitalization. Beyond the limited opinions stated above, I express no view as to whether any such participation would or could satisfy the requisite conditions.

I trust the foregoing is responsive to your request.

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