Question
From:
(Redacted)
Sent:
Friday, September 11, 2009 2:22 PM
To:
Verne, B. Michael
Cc:
(Redacted)
Subject: FW:802.63 Question
Hi, Mike:
Hope you are well.I am hoping to get your thoughts on the reportability of a new deal. Here isthe background:
Company A 's saleassets consist of a portfolio of securities comprised primarily of corporatedebt securities, mortgage-backed securities and other asset-backed securities.As a result of deteriorated market prices for the types of assets in CompanyA's portfolio, and following a financial covenant default causing anacceleration of secured notes issued by Company A, Company A's noteholders areexploring their options to protect the value of their investments through anexchange offer (the "Exchange Offer") and one or more publicforeclosure sales (collectively, the "Foreclosure Sale"). For reasonsdetailed below, we believe that the entirety of the described transactions areexempt under 16 C.F.R. 802.63. We would appreciate your confirmation of thesame.
As the first stepin the debt work-out, and solely as a means to allow the noteholders to creditbid their notes at the Foreclosure Sale, noteholders of Company A will have theoption to exchange their notes of Company A for notes (the "New Notes")issued by a newly-formed issuer ("Newco"). Newco will then use suchNew Notes to credit bid at the Foreclosure Sale for a proportional share ofCompany A's assets.
Formation of Newco
At this time, itis not known if Newco will be non-corporate or corporate in nature. It ispossible that, if Newco is non-corporate, it will be controlled by a person; itis certain that, if Newco is corporate, most or all persons contributing to itsformation will meet the size of person test and will hold interests in Newcovalued at or above the size of transaction threshold. However, it is our beliefthat the reportability of the formation of the Newco does not need to be vettedsince it is being formed solely in connection with a bona fide debt work-outand the contributors are contributing only their notes of Company A, cash andcash equivalents; no contributor is agreeing to extend credit or guaranteeobligations of Newco at any point in the future.
If you believethat the formation of Newco under these circumstances needs to be separatelyanalyzed for reportability, we would like to discuss with you whether theformation will be otherwise exempt under 16 C.F.R. 802.4 due to the nature ofthe assets contributed (we are confident that the vast majority of assets willclearly be exempt assets such as mortgage-backed securities and our onlyquestion in this regard is the need to analyze the collateral securing allnotes which will be contributed to determine if such notes are exempt.
PublicForeclosure Sale
It should be notedthat there has never been a public announcement by Company A or itsrepresentatives that Company A intends to file for bankruptcy, thoughbankruptcy has been and remains one of several restructuring options. In theabsence of such announcement, it seems that the "vulture fund"exception to the exemption contained in 16 C.F.R. 802.63 does not come intoplay, regardless of the subjective intent of the investors, assuming that allof the creditors of Company A extended credit (e.g., bought notes of Company A)in the ordinary course of their respective businesses, with a genuineexpectation of repayment, and that none is a competitor of Company A.
Although asizeable portion of noteholders are expected to participate in the ExchangeOffer for purposes of the credit bid at the Foreclosure Sale, some creditorsmay ultimately (i) obtain cash in extinguishment of the debt obligation, (ii)credit bid their notes directly for a proportional share of Company A's assetsand then hold such assets directly or (iii) credit bid their notes and, iftheir bid is successful, contribute their proportional share of Company A'sassets to the Newco in exchange for an interest in Newco. We believe that theexemption contained in 16 C.F.R. 802.63 will exempt the acquisition of Company A'sassets regardless of whether a creditor cashes out, credit bids directly oracquires assets through Newco in the Foreclosure Sale so long as such creditor(1) originally extended credit in the ordinary course of its business, (2)acquires/acquired its notes before Company A publicly announces an intention tofile for bankruptcy and (3) is not a competitor of Company A.
Please confirmthat you are in agreement with our conclusions and don't hesitate to let meknow if you have