Question
May 2, 2007
BY E-MAIL
MikeVerne
PremergerNotification Office
FederalTrade Commission
Bureauof Competition
600 Pennsylvania Avenue, NW
Washington, DC 20580
DearMike:
Wewould like to confirm that none of the steps in this transaction (the "Transaction")would be reportable under the Hart Scott Rodino Act (the "Act").
Parties
Theacquiring party is HoldCo, a non-corporate entity formed specifically to acquirethe assets described below pursuant to a secured party foreclosure. Prior toentering into the transaction, HoldCo will have no regularly prepared balancesheet and no assets other than interests in three wholly owned subsidiarycompanies PlantCo 1, PlantCo 2 and ClaimCo each of which will also hold noassets and have no regularly prepared balance sheet prior to the transaction.Holdco will be its own "ultimate parent entity."
All but one of the related parties in the Transactionwere involved in a sale-leaseback financing (the "Pass ThroughTransaction") for two power plants (the "Plants") in2000, as set forth in the diagram attached as Appendix A:
PassThrough Trust. The Pass ThroughTrust is a single purpose investment trust formed in connection with the PassThrough Transaction. As part of the sale leaseback arrangements, the PassThrough Trust issued certain pass through certificates (the "Certificates")to institutional investors and used the proceeds to acquire two nonrecoursepromissory notes (the "Lessor Notes") from the equityparticipant in the sale leaseback (the "Owner Lessor"). ThePass Through Trust holds the Lessor Notes for the benefit of the holders of theCertificates (the "Certificateholders"). The Certificatesrepresent fractional undivided interests in the Lessor Notes and any proceedsor distributions therefrom.
OwnerLessor. The Owner Lessor is a singlepurpose entity formed to serve as the equity participant in the Pass ThroughTransaction. The Owner Lessor acquired certain facilities related to the Plants(the "Facilities") with the proceeds of the Lessor Notes andan equity contribution from its immediate parent company. The Owner Lessorleased the Facilities back to the sellers pursuant to identical leaseagreements (the "Facility Leases"). The Owner Lessor pledgedthe Facilities, its rights under the Facility Leases and certain otheragreements, and all the proceeds thereof, as security for the Lessor Notes. TheLessor Notes are currently in default, but the Owner Lessor is not inbankruptcy.
ParentCorp.; Power Sub 1; Power Sub 2. ParentCorp. is a merchant power company that developed the Plants through two specialpurpose subsidiaries: Power Sub 1 and Power Sub 2. Power Sub 1 and Power Sub 2sold the Facilities to the Owner Lessor in the Pass Through Transaction andleased them back pursuant to the Facility Leases. Parent Corp. guaranteed thepayment and performance of the obligations of Power Sub 1 and Power Sub 2 underthe Facility Leases and certain related agreements. Parent Corp., Power Sub 1and Power Sub 2 are currently chapter 11 debtors in bankruptcy.
Thebankruptcy of Parent Corp., Power Sub 1 and Power Sub 2 gave rise to events ofdefault under the Facility Leases and under the Indenture for the Lessor Notes.After Power Sub 1 and Power Sub 2 moved to reject the Facility Leases in thebankruptcy cases and surrender the Facilities to the Owner Lessor, theIndenture trustee brought suit against the Owner Lessor for payment on theLessor Notes in federal district court. On motion of the Indenture trustee, thedistrict court appointed a receiver (the "Receiver"), whocurrently operates and has exclusive control over the Plants.
Assets
Theassets to be acquired in the Transaction consist of the Plants. the Facilitiesand certain bankruptcy claims against Parent Corp. arising principally fromParent Corp.'s guaranty of the obligations of Power Sub 1 and Power Sub 2 underthe rejected Facility Leases (the "Claims"). As a preparatorystep to acquiring these assets in a foreclosure, HoldCo will acquire the LessorNotes from the Pass Through Trust and then, by a strict foreclosure on asecurity for the Lessor Notes, acquire the Plants, the Facilities and theClaims.
Transaction Steps
Capitalization of HoldCo.
The Transactionprovides that certain current Certificateholders will capitalize HoldCo bytendering their Certificates and contributing cash to HoldCo in exchange forinterests in HoldCo. The majority, if not all, of the group tendering theirCertificates in exchange for interests in HoldCo will have acquired theseCertificates in the secondary market after the original Pass ThroughTransaction. Some of the group tendering their Certificates will have acquiredtheir Certificates after the bankruptcy filing of Parent Corp., Power Sub 1 andPower Sub 2. A subset of this latter group will have acquired theirCertificates after the date Power Sub 1 and Power Sub 2 gave notice of theirintention to reject the Facility Leases, and a further subset will haveacquired their Certificates after the transition of the Plants to the controlof the Receiver.
Acquisitionof the Lessor Notes.
TheTransaction further provides that HoldCo will pay cash and surrender all itsCertificates to the Pass Through Trust in exchange for the Lessor Notes.
Acquisitionof the Plants and the Claims.
Inthe final stage of the acquisition, the Owner Lessor and the Indenture Trusteewill execute a strict foreclosure agreement, pursuant to which the Owner Lessorand the Receiver will transfer the Plants and the Facilities to PlantCo 1 andPlantCo 2 and the Claims to ClaimCo in consideration for the extinguishment ofall indebtedness under the Lessor Notes.
Analysis
Wewould like to confirm the following:
1)The acquisition of Certificates byHoldCo is exempt from the requirements of the Act.
Becausethe Certificates are obligations which are non-voting securities, thecapitalization of HoldCo is an exempt transaction pursuant to Section 7A(c)(2).
2)The acquisition of the Lessor Notes byHoldCo is exempt from the requirements of the Act.
Like the Certificates, the Lessor Notes areobligations which are non-voting securities. Consequently, the acquisition ofthe Lessor Notes is an exempt transaction pursuant to Section 7A(c)(2).
3)The acquisition of the Plants and Claimsby HoldCo pursuant to the strict foreclosure agreement is exempt from therequirements of the Act.
Theacquisition of the Plants and the Claims by HoldCo pursuant to the strictforeclosure is exempt from the requirements of the Act pursuant to Rule 802.63, which exempts, among other things, acquisitions in foreclosure if madeby a creditor in a bona fide credit transaction entered into in the ordinarycourse of the creditor's business. The Pass Through Transaction was a bona fidecredit transaction entered into in the ordinary course of business of the PassThrough Trustee and the original Certificateholders. As successor in interestto the original Certificateholders and to the Pass Through Trustee as holder ofthe Lessor Notes, HoldCo is a creditor in a bona fide credit transaction.
Furthermore,the so-called "Vulture Fund" exception to the foreclosure exemptiondoes not apply. Albeit some Certificateholders acquired their Certificatesafter the bankruptcy filing of Parent Corp., Power Sub 1 and Power Sub 2, thedebtor in this case is the Owner Lessor, which is not in bankruptcy.
4)Notwithstanding the "VultureFund" exception, the acquisition of the Claims by HoldCo is not subject tothe requirements of the Act.
ParentCorp. and its affiliates have not yet filed a plan of reorganization.Consequently, the Claims may represent a right to receive either (i) votingsecurities or securities convertible into voting securities; (ii) non-votingsecurities; or (iii) cash. Thus, the Claims against Parent Corp. can beconsidered either (i) the equivalent of convertible securities, the acquisitionof which is exempt under Rule 802.31; (ii) the equivalent of non-votingsecurities, the acquisition of which is exempt under Section 7A(c)(2), or (iii)the equivalent of cash, the acquisition of which is exempt.
Inthe event that the foreclosure transaction is not exempt, and the acquisitionof the Plants and Claims is subject to the requirements of the Act, we wouldalso like to confirm the following additional points:
5)Assuming HoldCo has no assets other thanthe Lessor Notes and its interests in PlantCo 1, PlantCo 2 and ClaimCo prior tothe foreclosure transaction, the total assets of HoldCo for the purposes of thesize-of-person test would be $0.
BecauseHoldCo will not be controlled by any other person and will have no regularlyprepared balance sheet, the total assets of HoldCo will be determined pursuantto 16 C.F.R. 801.11(e). Since the Lessor Notes are securities of the acquired person, they arededucted from the total assets of HoldCo pursuant to 16 C.F.R. 801.11(e). Furtheliuore, prior to the acquisition, PlantCo 1, PlantCo 2 andClaimCo will have no assets. Consequently, HoldCo will have no assets forpurposes of the size-of-person test.
6)For the purposes of thesize-of-transaction test, HoldCo may consider only the value of the assetsreceived in consideration for debt acquired after the bankruptcy filing ofParent Corp., Power Sub 1 and Power Sub 2.
Accordingto informal interpretations of the PNO, the acquisition of debt prior to adebtor's bankruptcy filing is regarded as a bona fide credit transaction in theordinary course of a creditor's business, whereas the acquisition of debt aftera bankruptcy filing is not. Consequently, the acquisition of assets inforeclosure is exempt to the extent the discharged debt was acquired in a bonafide credit transaction prior to a bankruptcy filing, and the acquisition ofassets in foreclosure is reportable to the extent any discharged debt wasacquired after a bankruptcy filing.
Indetelluining the size of the foreclosure transaction, therefore, HoldCo wouldconsider only the value of the Certificates acquired after the bankruptcyfiling of Parent Corp., Power Sub 1 and Power Sub 2.
7)Assuming the Claims are not exempt from reporting, and to the extent thatpremerger notification is required, the Receiver is the acquired person in theTransaction.
Pursuantto Rule 801.1(a)(1), the term "person" means an "ultimateparent entity and all entities which it controls directly or indirectly. Thephrase "ultimate parent entity," in turn, signifies an entity that isnot controlled by any other entity. Rule 801.1(a)(3). The term"entity" expressly includes "a receiver for [a corporation,company or partnership], acting in his or her capacity as such." Rule 801.1(a)(2).
Althoughtitle to the Plants will not be transferred until the foreclosure isaccomplished, the Receiver, as an agent for the federal district court, hascontrol of the Plants for all purposes, including operating the Plants forcommercial purposes pending a resolution of the suit for payment on the LessorNotes. Neither the Owner Lessor nor the Owner Lessor's ultimate parent has anycontrol over the Receiver. Consequently, the Receiver is the "ultimateparent entity" for the Plants under his control and is the acquired personfor purposes of the Transaction.
We look forward to youradvice. Thank you for your assistance with this matter.