CFTC Staff Letter 89-16: No-Action Relief for Inco Limited Floating Rate Notes

UNITED STATE$ Of Ae.4ERICA
COMMODITY fUTURES TRADING COMMISSION
203.3 K Street, N.W.
Washington. D.C. 20581 r .. ,. .. \ I u-·1 ll!. ::· =·· f L\· 1 • • ·.' . .);. !~ - - Septe~r 30, 1988 Rez Proposed Issuance of Floating Rate Notes ~his i• in response to a letter dated August.s, 1988, subml tted by (August 5 Letter) , as mupplemented by a letter dated September 28, 1988 (September 28 . Letter), on behalf of (Issuer), a corporation engaged internationally J.n the business of -J'he I•suer i• proposing t.be di•trlbution to its

• hareholder• of rights (Rights) to purchase floating-rate notes
  (Notes) with interest varying with changes in the price of which, together vith certain by-products and co-product•, accounted for •ore t.luul 1St of the Issuer's consolidated net •ales·in 1987, which exceeded $1.7 billion. Your firm has requested that the staff of the Commodity Futures Trading Comd ausion (Commission) confU. that it vill mot recommend to the Commission that it initiate any enforcement action against the Issuer due to it• participation tn the offering described in the August 5 and SeptU'!her 28 Letters .. Based upon the representations cont.ained .in t.be August 5 and September 28 Letters, •• supplemented by di•cussion• vith Commission staffs ve under•t.and that the relevant fact.. include the follow!.Dg-.. -J'he Is•u•r had con•olidated total •••et• of 110re 'than $3 .. 3 billion as of June 30, 1988. ~he I•suer'a camaon share• are listed on the ~ew York Stock Exchange (NYS!) and on Tarious foreign atock exchanges. ~ of Hay 2, 1988, the ls•uer had more than .dlllon outstanding •hares of common ateek, of which there vere·.ore than holders of record. More than holders of record of the Issuer•• outstanding common ahares,

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  \ representing approximately 55% of the outstanding shares, have U.S. addresses.
  The Issuer proposes to distribute to its shareholders Rights to purchase up to million aggregate principal amount of · floating rate Notes. The Issuer contemplates declaring. a dividend of one Right for each common share owned. .A certain number of Rights, yet to be determined by the Issuer, would entitle the holder to purchase one Note having a principal amount of for a cash payment equal to such principal amount. 1/ The Rights would be exercisable on and after the date of issuance for no less than 21 and no more than 72 days. You anticipate that the Rights would be listed on the NYSE and traded on a when-issued basis prior to their issuance. The Issuer's financial advisor, , anticipates that a majority of the Issuer's common shareholders would sell their Rights in the open market prior to the expiration of such Rights .. The Notes will be registered under the Securities .Act of 1933 (Securities Act) and issued in accordance with the requirements of state securities commissions. If listed on the NYSE, the Notes also would be registered under the Securities Exchange Act of 1934 (Exchange Act). The Issuer will deposit cash or Notes to a sinking fund such that the total amount deposited would fully amortize the Notes. The Notes will be redeemable by the Issuer at its option at any time, and the Notes may be subordinated to the Issuer's other indebtedness. Interest on the Notes would be payable semi-annually, at an annualized·rate equal to a fixed rate of at least (Floor Rate) plus· a variable interest component calculated by reference to the average market price for on a three-month forward basis, as quoted in u.s. dollars on the · during the six-month period ending one month prior to the commencement of the relevant interest payment period. The Floor Rate would be adjusted to equal at least 35% of the rate that the Issuer could expect to pay on a fixed-rate debt issue of comparable size. 11 You have represented that the Issuer may permit holders of Rights who are citizens to elect to purchase Notes denominated in dollars. You further represent that, based on current exchange rates, the minimum denomination of Notes of that series would equal approximately -

Varia.bl• btttreat pa:YJtenta calculated by :~:eference to the price of · vill Dot exceed 20\ of t.he principal aaount of the

• otea on an average annualized baaia.
  Xn an Advance lllotice of Propoaed RuleaakiDg Jtelatirag to the Jtegulation of Certain Bybrid and·Related Inatru.ents (Advance
• otice), 52 ~. ~· 47022 (December 11, 1987), the Commission
  baa requeated e~nt on a propoattd ~:egulatory framework vhich, among other thinga, would provide an exemption from Commission regulation for certain •otherviae-regulated• ~natruments ~aving only incidental option-like component•. In.view of the fact that _ t.he Advance aotice :~:emains pending and t.hat t.he Commlsaion has not reached a final determination vitb :~:espect t.o t.be proposals aet forth t.herein, t.he ataff believes that it ia appropriate, in limited circumstances such as this, to addre•• certain instru￾aents on a ease-by-case basis. Baaed upon t.he representations contained ~n t.he August 5 and September 28 Letters, as aupplemented by diacussions vith Commission ataff, t.be staff has compared the proposed offering to t.he criteria aet forth in the Advance Notice, as summarized below. 1../ (1) ~erm to Matprity You ~ave r~presented that the Notes vill have a maturity of either or years, which is in excess of the ~nimum three-year term specified in the Advance Notice. (2) Maximum Commodity-Baled Betuin and Minimum tion-Comm9dity Based Return AI propoaed in the Advance Notice, the exemption £or certain otherwi1e-regulated instrument• would be conditioned upon compliance vith a requirement that the hybrid instrument have a 2inimum annual yield or return independent of ~ts commodity- related component equal to at least lSt of the eatimated annual yield at t.he t.ime of isauance for a comparable pure debt or depository inatrument and a aaximum average potential return on 1..1 ~ represented t.o as, the Rights vill have Do value except as a J~Dechanism enabling the purchase of . a Mote. In view of t.he facti and circumstances of the propoaed-Dffering, the staff has not aeparately analyzed the Rights againat the criteria set forth in the Advance Notice. We note, however, that in .other circumstances, right1 offerings ~y potentially warrant separate scrutiny. I ,

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\ it.• ~- odit:y-relat.ftd CCi!lllpODent of 20\ on an arwualizftd ba111i111 of the total principal or face aaount of the llybrid i!ullt.rv..ent.. As de•cribed in the August 5 Letter, the Wotea would bear intere111t, payable eud-am1ually 11 at olllD ~ualized rate between t.he l'loor ~te 11 which vill be fixed at DO 1eaa than and a ceiling rate anticipatftd to be but 11 .ln any event, affordi.Dg a commodity- related return DO greater than the 20\ ~xfwua a~erage annualized return proposed in the Advance IJotictt.. !rhus 11 subject to the 18\ (or adjuated) ceiling, .i.Dterest payable on the Wotea vlll be compriaed of the fixed, Don-commodity :rield (Floor bte) ..t!Uld a Yariahle component 11 calculated by reference to the average price of on a three-~nth forward basi• during the aix-month - period ending one aonth prior to the commencement of the relevant i.nterest-payment period.. _ _ . ~ atated in the August 5 Letter, the %111111uer and its finan￾cial advi•or have indicated that the •otelll vill have • floor, mon-c:::ommodity-indexed interest rate that will not be 1••• than \ and that thi• rate vill be fixed in 111uch a aanner that it will equal or exceed 35\ of the eatimated annual yield for comparable fixed-rate debt of the %asuer at the time of i111111Uance of the tiotes.. You have further represented that although the 18\ ceiling rate for the aggregate commodity-related and Don-com￾JIIIOdity-related return ~DAY be adju111ted, ill DO event vill the Notes' commodity-related return exceed the maximum 20\ average annualized return propo111ed in the Advance ~otice• (3) Line of Busineps ~be %111auer 1• engaged in the busine•• of products. The commodity-related return on the ~otes ia indexed to t.he price of vhich ac:::counted for aore 'than "'S\ of the Iaauer'a conaoli~tea met aale• in 1987.. · (~) ptberwl•e-Regulpted Yhe August· 5 Letter etates that the I111111uer ha111 been regi111tued vith the Securitie• and bch&Dge Ccmrmi111sion (S!C) fo:r IIWl:f yeua and file• periodic nport111 under the Bxch&Dge Act and pursuant to •ariou• foreig-n •ecu:rities regulatory. and atock exchange requirement•. ~he 1Jote111 vill be regi111tered under the Securities Act, and appropriate filings vill be aade vith atate aecuritiea eommiaaions.. %ou anticipate that the-tiotes will be liated for trading on the HYS!.. If the ~otes are liated on the ~SE, they also v~uld be registered ander the Exchange Act.. Yhe Note• will be iasued pursuant to an indenture complying with the requirements of the Trust Indenture Act of 1939 and of the

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Xssuer•a jurisdiction of incorporation. A prospectus relating to the Botes will be filed with the S!C, certain atate aecurities ~ssionera and the aecur!tles regulator of the Iasuer'a jurisdict.ion of hcorporation. (5) ~rketing and Pltelppnro Yhe lRotes will be IIUldceted as aeeuri ties, vi t.b t.he .indexing ~eature of the ilotee t.o be disclosed as required by the - disclosure zequir.-ents of applicable aeeurit.ies lave. (6) Special Call• ~he exemptive relief proposed in th2 Advance Notice would also be conditioned upon the Issuer's a.nderta.'king to submit to special calla for information to demonstrate compliance with the conditions of the ataff'a no-action position. You have represen- ted that t.he Issuer will agree to comply with aucb requests for .info:t'JW!ltion by the Cnmmi as ion. (7) Fet Worth and Cpyer %n t.he Advance 5otice, t.he Commission proposed to condition exemptive relief upon compliance vit.h a requirement that the Issuer have at least $100 million of net worth and BAintain specified cover to ensure performance of the commodity-related obligations created by the hybrid .instrument.. Yhe August 5 Letter states that, as of June lO, 1988, t.he Issuer's consolidated net worth exceeded $1.3 billion. The August 5 Letter further represents that the ·xaeuer has sufficient . . reaerves t.o sustain production of at 1987 levels for more than 30 years. Xn addition,~rou have repreaented that assuming (i) a $300 Billion offering, (1 ) prices at but not higher than the price preaenili expected to trigger the BA.Ximum possible interest rate a.nd ( ) production at constant 1981 levels, the commodity related component of the bterest ~nae ($«2 aillion per am:a'Wi) would account for _1eea t.}lan 10' of the value of the Iaauer'a annual production of · and ita pr!Dcipal co-product. You bve further represented that. the · Iaauer intends to aaintain reserves adequate t.o cover the ~ty-related portion of ita obligations on the 5otes. (8) tilnimum unit Price ~e Advance aotice propoaes a ainLmum unit price for qualifying hybrid instruments of $20,000. The Ieauer propoaes to issue the Notes in a minimum denomination of $500. Notes can only be purchaaed by accumulating a sufficient number of Rights,

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  which rights will accrue only to existing shareholders.
  Therefore, effectively, there is Do public offeriD9 of the ~otes independent of 'the %sauu'e COIIIII:mOn stock.. · You have cited several Z'4UUiona ~or 'the proposed $500 denomination of the Motes. The Xasuer repreaents 'that if aillion of Motes ~• offered in $20,000 denomination•, More than t9\ of the %aauer's individual shareholders would receive too ffiW llighta to enable purchase of a Mote.. ::11 Baaed apon.t.he currently anticipated size of the offering, mllion, only 0.7\ of the %ssuer's individual shareholders would receive ~ufficient Rights to enable them to purchase a $20,000 Mote. Bowever, virtually all shareholders holding 100 or BOre common shares, approximately l5t of all common ahareholders, would r.ceive a aufficient. Dumber of Might.s to purchase one or acre $500 Notes .in a to · · Billion offering. . %f the Rotea were offered in' $20,000 denominations, you represent that. it is likely that. BOat amall shareholders would receive insufficient Rights to permit. purchase of a Mote, ~I You have represented in your September 28 Letter that approximately 65' of the Issuer'• total shareholders hold fewer than 100 sharea each. · . · the Iaauer'• financial advisor, baa calculated that ln the event of a Rilion offering, a shareholder vould.need approximately 1 1 050 Rights to purchase one Note vitb a $20,000 denomination. Baaed on recent ~ket prices, the 7,050 common sharea neceasary to obtain such Dumber of Rights would be worth ~re than $19l,too .. · Only 0 .. 7\ of the Isauer'• record shareholders would receive sufficient Right.• to purchase a Mote h those circu..mat.&Dcea. You also have calculated that if the Motes vera offered at a $20,000 denomination h a aillion offering, only 0.6\ of the %sauer'• record shareholders would receiYe sufficient Rights to permit them to purchaae a Mote. Thus, if llidllion of Motes were offered in $20,000 denominations, IIIOH than t9\ of the Issuer'• record shareholders would receive too few Rights to enable purchase of the Motes. 'fw lulve ooted, however, that approximately 56\ and 64t of all record ahareholder• holding 100 or acre common sbar_.- (approximately 35' of all ccmmo~ shareholders are at least
• round-lot• holder•) would receive a aufficient number of
  Rights to purchase one or ~ore $500 Notes in, respectively, a ~llion and a Rdllion Rights offering.

---------·~-------------------------- ------ potentially adversely affecting the value of the ~gbts and tending to frustrate the Xasuer'• attempt to achieve a vide distribution of Mote a to facilitate developeent ·of a liquid exchange aarket for the benefit of Don-institutional ~tote holders.. Xn addition, as t.he proposed offeriDg .ls Dot an andervritten offering, if the liotes were Dot accessible t..o purch&IIIUI by the %a suer' a amall. sbarttholders, the ablleDCa of a atandby andervriting COIII"ft.J!Mmt with n~ to the proposed offering could result in a shortfall .in the .ubscription of · llotes to a degree below the offering size sought by t.be :tsl"uer .. Baaed upon our understanding of the representations in your August S and September 28 Letters, as aupplemented by diacua11iona vith Commi~sion staff, the staff has concluded that the pro~aed

• offering aa outlined in your letters is consistent vit.h t.he
  criteria for exemptive relief set forth in the Advance Motice except the requirement of a ainiaum unit size of $20 1 000. ~he staff is of the view, however, that the special circmutancea of the proposed offering, vhich is to be I!Ulde to existing common shareholders of the Iaauer, render application of the minimum denomination requirement proposed in the Advance Notice unwarranted. Rather than providing a protection to potential purchasers. of hybrid inatrw:Denta, the proposed B.inimum unit size could, in the ci~tancea of this proposed offering, cause a reduction in the value of the Right• to be distributed to existing shareholders. ~he lower unit size proposed for the Notes haa the potential to enhance the ability of a broader class of shareholders to realize the value of the Rights distributed to them, vhile alae facilitating the listing and trading of the Notes on a national securities exchange .. ~herefore, the staff will not recommend to the Commission that it initiate any enforcement action under Section 4c of the Commodity Exchange Act, 1 u.s.c. 16c (1982), based solely upon the distribution of Rights and issuance and offering of ltotea as specified in the August 5 and September 28 Letters.. IJ'his position does not. excuse the Issuer from camplyag with any otherwise applicable provisions of the Commodity Exchange Act or Commission regulations thereunder, Dor does it. address any other instru~~Mnt. or proposed hst~nt... IJ'his posi t.ion is based upon our understanding of t.he facts as contained in your letters, as supplemented by discussions vit.h the staff.. Any different, omitted or change~ facts or conditions BAY requ~a different conclusion. In this regard, you should notify the ataff in the event that the proposed offering of Rights or Notes differs in any respect from the particulars contained in your letters and discussions with the staff. .

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Finally, ~t •hould be Doted that this position Lu that of the staff and iu Dot binding upon t.he ("ommi uuion and that any

• ubuequent determination.by the CommSuuion with regard to the
  rulemaking proceeding initiated by the Advance llotice aay requir( a reconuideration of this •t.a.ff pouition .. ~I!~.{ ·paula A. Tosini Co-Chairman Off-Exchange ~ask Force