NATIONAL ASSOCIATION OF BOND LAWYERS
Voice from the Past
Chapter 5
One of the industrial development bond issues that caused
Congress to start limiting the
tax exemption of such bonds may have been a $67,000,000
transaction for an aluminum company
in Calcasieu Parish, Louisiana. George Ramspeck worked on the
lease and I worked on the
indenture for this issue, and George Pitt ably backed us up. The
user of the facility was a
subsidiary of a Swiss aluminum company. The parent had looked at
several sites, including
British Columbia and Iceland, where they could get hydroelectric
power cheaply, as electricity is
the major cost in refining aluminum; but the combination of
cheap natural gas, accessibility to
shipping, and tax exempt financing in southwestern Louisiana won
out.
The lead underwiter was Glore, Forgan & Company of Chicago,
represented by Jim
Jamieson, a man who was used to putting large deals together.
He knew that the newly formed
subsidiary would not have the credit to sell the issue, so he
arranged for a take-or-pay agreement
under which the Swiss parent would agree to take or pay for
enough of the plant's output so that
there would be enough money to pay the bonds. Such agreements
were customary in financing
steel mills, and he thought it would work for this aluminum
company. But some of the potential
investors wanted to know how a bondholder could enforce such an
agreement against a Swiss
company. A letter from a solo practitioner in Zurich to the
effect that such agreements could be
enforced in Swiss courts didn't encourage them.
So the deal was re-cast with Phelps-Dodge agreeing to guarantee
payment of the bonds,
or of rentals sufficient to pay the bonds. This proved
satisfactory to potential investors, but it did
raise one challenge for bond counsel. The guaranty had to be
treated as a separate security for
SEC purposes, and as such had to be registered with the
Commission. The then head of Chapman
and Cutler's SEC department was willing and able to take care of
this with one exception. Since
the indenture was the instrument through which the bondholders
would be secured, the indenture
had to be qualified under the Trust Indenture Act of 1939; he
didn't qualify indentures. (Not
long after that we got a new head for this department). This was
left up to a municipal bond
lawyer who had never had anything to do with the SEC, namely, me.
I was warned of an SEC
ogre named Sam Binder who was very hard on lawyers who made the
least little mistakes in their
work, and told to do the best I could.
I got a copy of the Trust Indenture Act, and proceeded to
incorporate a swarm of
provisions and technical changes in the form of indenture. It
would not do to incorporate the Act
by reference, nor to include all the pertinent provisions in a
separate section beginning, "Anything
to the contrary herein notwithstanding..." And I had to come up
with a workable indenture that
the trustee could understand and follow, so all items in the form
that might conflict with the
required provisions had to be eliminated or modified. Some of
these items, pertaining to the right
of the trustee to get away with almost anything, were ones that
trustees generally insisted on in
unregistered deals, but the trustee on this transaction was
pretty docile when told that the new
provisions were required by the SEC. This experience provided me
with a memorable lesson in
the shenanigans trustees had employed before the Act was adopted,
especially in situations where
the same bank lent its own money to an issuer and also acted as
trustee for its bondholders.
Eventually I contorted the indenture to include the required
provisions, to eliminate the
proscribed ones, and to comprise a workable document. When the
draft was completed, I
prepared a short guide showing, on the left side, the number of
each pertinent section of the Act,
and on the right side, the number of the section of the indenture
in which the required provision
was incorporated. Then, apprehensively, I sent the draft
indenture and guide off to Mr. Binder.
Several days later I got a telephone call, and when I learned it
was he, began to sweat. The
sweating stopped when he said that I had submitted one of the
best forms of qualified indenture
he had ever seen, and was very complimentary. He had a couple of
questions that I answered
easily, and told me to cut out the nonsense when I explained that
I was not a corporate securities
lawyer but a mere municipal bond lawyer who worked on indentures
only occasionally.
The most sincere mark of his respect for my work came a few
months later when a lawyer
from a major California firm telephoned and, in a slightly
apologetic tone, asked for
some help. Mr. Binder had told him to call me to find out how to
qualify an indenture.
Eventually the transaction came to market. At that time
Louisiana law required industrial
development bonds to be sold at advertised public sale. I had
wondered how Jim Jamieson was
going to make the sort of profit he would expect under the
circumstances, and I found out. He
included in his syndicate every dealer who was likely to form his
own, or to be a major player in
another, syndicate to bid on bonds of this sort. So when the
bids were taken, Glore, Forgan &
Company's syndicate submitted the only one.
This being in the days before our SEC department told us not to,
I later bought a few of
the bonds for my own account, and remembered the transaction with
fondness every time I
clipped the coupons. I was sad when they matured and I had to
turn the bonds in.
Manly W. Mumford