Question
From: (redacted)
Sent: Friday,January 13, 2006 3:39 PM
To: Verne, B.Michael
Subject:Section 802.63 follow up
Mike, in follow up to our discussionearlier today I wanted to confirm that you agree with the conclusion that the802.63 exemption would be applicable to X's conversion of its bonds in thefollowing fact scenario.
X is a private investmentfund that manages $20B in bank loans that are primarily non-defaulting loans. Yis a privately held company and the majority of its equity is held by a privateinvestment fund, Z. Back in 2001, Y had financial difficulties but was turnedaround or infused with cash by Z. Beginning in September 2004, X beganacquiring nonconvertible subordinated debt securities ("bonds")issued by Y in open market purchases. At the time of purchasing the bonds X hadno intention to buy bonds that would ultimately be converted to votingsecurities but rather the price was good and had hopes that the prices wouldincrease. In addition to outstanding bonds, Y also has a senior secured creditfacility. In June 2005, Y modified its senior credit facility terms and hascontinued to modify it by amendments over the last six months. In its Q1 10-Qfiling (filed June 30) Y discussed that it may not be able to comply withfinancial covenants by 9/30/05. Subsequently Y entered into amendments relatingthereto. X made purchases of the bonds at various times but acquiring the majorityof its position prior to June 28, 2005 making additional small purchases ofbonds through mid-November 2005 and now holds approximately 2/3 of the bonds(total issue $149M). Y was exploring liquidity options via asset sale or saleof the company in the fall of 2005. In mid-September 2005, X first learned thatZ was unlikely to provide cash for a turnaround. Then in October/November 2005,Y and the bondholders began discussions about a restructuring that wouldinclude a conversion of the bonds ($100M face amount) into 96% of the equity.In its Q3 10-Q filed November 14, 2005, Y stated that it had liquidity problemsand may no longer be a going concern but no indication that it was consideringbankruptcy. To date, there have been continued amendments to the senior creditfacility and ongoing restructuring discussions with the bond holders and nodiscussion about a bankruptcy. Upon conversion of its bonds to equity, X willhold in excess of 60% of the company's voting securities valued in excess ofthe $56.1 million threshold.