SEC Division of Investment Management staff letter: New America High Income Fund, Inc.

JUL 29 1993

P 'BLJ -....# Our Ref. No. 93-408-CC The New America High RESPONSE OF THE OFFICE OF CHIEF COUNSEL Income Fund, Inc. DIVISION OF INVSTMENT MAAGEMENT File No. 811-5399 By letter dated July 7, 1993, you request our assurance that

we would not recommend that the Commission take any enforcement

action under Section 18 of the Investment Company Act of 1940

(the 111940 Actll) if the New America High Income Fund, Inc. (the IIFundll) issues $100 million of Auction Term Preferred Stock ("ATpii), $80 million of which will be used to redeem the Fund's outstanding senior securities. The Fund will use the additional

$20 million to increase its leverage.

You represent that the Fund's capital structure currently

complies with the provisions of Section 18 of the 1940 Act. The

Fund currently has outstanding $45 million aggregate principal

amount of bank financing and $35 million aggregate liquidation

preference of Taxable Auction Rate Preferred Stock, which will be

redeemed with the proceeds of the ATP offering. The redemption

will take place contemporaneously with the ATP offering. 1/

Immediately after the Fund issues the ATP, (1) the Fund's capital

structure will not comply with the asset coverage requirements of

Section 18 (a) (2): y and (2) the Fund IIwill have outstanding more
than one senior security which is a stock, II in violation of
Section 18 (c). You state that following completion of the

redemption, however, the Fund's capital structure will comply

with all the requirements of Section 18, including the provisions

regarding asset coverage and the election of directors set forth

in Section 18 (a) (2) .
Section 18 (e) generally exempts from the provisions of

Section 18 senior securities issued by a closed-end fund for the

purpose of redeeming any of the fund's outstanding senior

securities. Section 18 (e) is necessary because of the temporary

noncompliance with Section 18 that could exist for the period

after a fund issues senior securities for redemption purposes and

before it completes the redemption. Because the Fund proposes an

offering that exceeds redemptions by $20 million, the offering

does not fall squarely within the terms of Section 18 (e) and

therefore does not qualify in its entirety for the exemption.

The Fund essentially proposes to combine an $80 million offering

under Section 18 (e) with a $20 million offering that otherwise

would be permissible under Section 18 after the Fund retires its

existing $80 million in senior securities. You argue that,

al though the Fund's capital structure will violate Section 18 for

1/ Telephone conversation between Amy R. Doberman and

Jeffrey A. TeiCh, dated July 28, 1993.

Y Section 18 (a) (2) requires a closed-end fund to have asset coverage of at least 200 percent following the issuance of

preferred stock.

a short time prior to completion of the redemption, it would exalt form oVer substance to force the ~LßO conwo separate offerings, resulting in greater expense to the Fund. l/

On the basis of the facts and representations in your

letter, and without necessarily agreeing with your legal

analysis, we would not recommend enforcement action to the

Commission if the Fund conducts an offering for the combined

purposes of retiring existing securities and increasing the

amount of the Fund's outstanding senior securities. Our position

is particularly based on your representations that the Fund's

capital structure currently is in compliance with all the

requirements of Section 18, and will so comply after the

redemption is completed.

¿/) i~

íl I ~ 1(, M ¿-t. t1'l;ÅV1
Amy R. Doberman
Senior Counsel l/ You explain that, for example, the Fund could, in strict

compliance with Section 18, refund the $80 million of

existing senior securities and immediately thereafter issue

an additional $20 million of ATP.

• 2

Investment Company Act of

1940
Section 18 (e)
GOODWIN, PROCTER & HOAR
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS ----d.NSEt.LuR:: AI LAW

EXCHANGE PLACE
BOSTON. MASSACHUSETTS 02109-2881

TELEPHONE (617) 570-1000

TELECOPIER (617) 523-1231
TELEX 94.0640

CABLE. GOODPROCT. BOSTON
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July 7, 1993
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Secu r i ties and Exchange Commission ....~..='~..~~,,~"-;.,';:~¿t_~.~,..~... 450 Fifth Street, N.W.

washington, D.C. 20549

Re: The New America High Income Fund, Inc.

Ladies and Gentlemen:

We are counsel to The New America High Income Fund, Inc., a

Maryland corporation (the "FundW). The Fund presently has

outstanding $45 million aggregate pr incipal amount of bank

financing and $35 million aggregate liquidation preference of

Taxable Auction Rate Preferred Stock (WTARPS.). The Fund

proposes to retire these securi ties (including all accumulated

and unpaid dividends and all accrued and unpaid interest)

contemporaneously wi th the issuance of a new Auction Term

P refer red Stock (W ATP" ), for an aggregate redempt ion pr ice of

approximateiy, $80 million. The Fund also proposes to issue

approximately, $20 million of additional ATP as part of the

refunding transaction in order to increase its leverage to the

level specified by the Board of Directors. Upon completion of

the proposed of fering, the Fund's senior capi tal structure will

consist of $100 million of ATP and will be in compliance with

all of the requirements of Section 18 of the Investment Company

Act of 1940 (the w1940 ActW).

Section 18(e)(1) of the 1940 Act provides that Section is

shall not apply to any senior securities issued or sold by any

registered closed-end fund "for the purpose of refunding

through payment, purchase, redemption, retirement, or exchange,

any senior secu r i ty of such reg iste red investment company . . .. W The Fund proposes to offer and sell the

$80 million of ATP pursuant to this provision to refund the $80 million of senior securi ties presently outstanding. In addi tion, the Fund proposes to offer simul taneously the

addi tional $20 mill ion of ATP otherwise permi tted pursuant to

Section is (a) .

GOODWIN, PROCTER & HOAR
Securities and Exchange Commission

July 7, 1993

As we have discussed in our telephone conver sations wi th and in a letter dated June 23, 1993 to John Grzeskiewicz, the

Fund i s review examiner, we believe that the Fund's offering of the ATP pursuant to Section 18 (e) (1) and Section 18 (a) of the 1940 Act will not resul t in a violation of Section 18 of that

Act (including Sections l8(a)(2) and l8(c) thereof). We

respectfully request confirmation that the Staff would not

recommend action to the Commission if the Fund were to offer

and sell the $100 million of ATP in a single transaction pursuant to Section l8(e)(1) and l8(a). Although there is very little authority interpreting

Section 18 (e) (1), the few references to this provision in the

legislati ve history of the 1940 Act indicate that subsection

(e) was intended to exempt from all of the other provisions of

Section 18 senior securities issued by closed-end investment

companies to refund other outstanding senior securities,

whether or not these other securities were issued and

outstanding at the time the 1940 Act was passed.l/ The

secondary sources which we have reviewed also support this view

but do not address the issue of whether there may be a

simultaneous issue of an additional amount of the refunding

security provided that such additional amount would be

permitted under Section 18(a) .~/ l/ See S. Rep. No. 1775, 76th Cong., 3d Sess. 16 (1940)

TTxcept for refunding of outstanding securities and securi ties issued in connection wi th reorganizations,

closed-end companies in the future may not issue more

than three classes of securities. . .."); H. Rep. No.

2639, 76th Cong., 3d Sess. 18 (1940) (.Subsection (e) exempts f rom other provisions of (Section 18) senior

secur i ties issued by investment companies to refund senior securi ties and senior securities issued in

connection wi th a reorganization . . ...); Hearings on

H.R. 10065 Before a Subcommittee of the House Committee

on Interstate and Foreign Commerce, 76th Cong., 3d Sess.

(1940) ("Refunding of existing senior securities will be

permitted irrespective of above restrictions."). The one

ruling which we have found which addresses Section

18 (e) (1), In the Matter of Townsend Corporation of

America and Townsend Management Company, 42 S.E.C. 282

(1964), involved relatively unique facts and is not

relevant to the proposed offering by the Fund.

~/ See 3 T. Frankel, The Regulation of Money Managers 150

Ti80). ("Section l8(e) exempts from all provisions of

Section 18 certain issuances and sales by closed-end
investment companies. The exemption is (Footnote Co ntinued on Next Page)

GOODWIN, PROCTER & HOAR
Securities and Exchange Commission

July 7, 1993

In the absence of authority specifically dealing wi th the

situation presented by the Fund's ATP offering, we believe it

is appropr iate to apply Section 18 in a manner that achieves

the policies and purposes of the 1940 Act. In this regard, it

is significant that the Fund would not be offering any ATP but

for the need to refund its existing senior securi ties. It is

clear that the Fund would have the ability to increase its

leverage by issuing additional TARPS and/or incurring

additional debt shortly before the closing of the ATP offering

in order to have $100 million of outstanding senior securities,

and thereupon wrefundft the full $100 million in a transaction

subject to Section 18 (e) (1) . It is also clear that the Fu nd

could refund only $80 million of existing senior securities in

a Section 18 (e) (1) transaction and immediately thereafter issue an additional $20 million of ATP. We believe that requiring

the Fund to adopt ei ther of these approaches, rather than

issuing $100 million of ATP in a single transaction, would

elevate form over substance and impose additional costs on the

Fund.
As noted above, the Fund's capital structure now complies

wi th the requ irements of Section 18 and will so comply upon

completion of the $100 million refunding transaction. The

redemption of the existing senior securities will occur

concurrently wi th the issuance of the new ATP, and thus the

Fund should not be viewed as having both TARPS and ATP

outstanding. If the Fund were not permi tted to use the

proceeds of the ATP offering to redeem the TARPS, the Fund

would be required to redeem the TARPS before issuing the ATP.

This generally would require the liquidation of portfolio

securities prior to the redemption of the TARPS and the

reacquisition of these and/or securities after the issuance of

the ATP. This would resul t in significant transaction costs

and could result in additional economic loss to the Fund if the

prices of the relevant securities rose during the period

between the redemption of the TARPS and the ATP closing.

Under these circumstances, we believe that it is

appropriate to view the Fund's offering of $100 million of new

ATP as a transaction which combines an issuance permi tted for the purpose of refunding its existing senior securities within

the meaning of Section l8(e)(1) with an additional issuance

permitted under Section l8(a). Such an interpretation, we

believe, correctly focuses on the substance rather than the

(Footnote Continued)

l/ u ncond i tional. . . . Thus, if a Company's s tructu re was in conformi ty wi th section 18, the issuance or sale of senior securi ties pursuant to Section 18 (e), whi ch would

render the capi tal structure non-conforming, is

nonetheless exempt. W)

GOODWIN, PROCTER & HOAR
Securities and Exchange Commission

July 7, 1993

form of the proposed offering and is consistent wi th the purposes and legislative history of Section 18 and the best

interests of the Fund's shareholders.

Based upon the foregoing, we respectfully request

confi rmation that the Staff would not recommend action to the

Commission if the Fund were to offer and sell the $100 million of ATP in a single transaction pursuant to Section 18 (e) (1) and 18(a). If you have any questions regarding this request, or

requ ire any addi tional information in connection herewi th,

please call the undersigned at (617) 570-1483 or John R.

LeClaire at (617) 570-1144. Pursuant to Investment Company

Release No. 6330, we are transmi tting one signed and two add i tional copies of thi s request. Sincerely, J ' r ;, ,. J 1/ l ,/ L. " t..

./
////! ' , le~ frey A . Te i ch cc: Carolyn B. Lewis, Esq.

Assi stant Director

David Wills, Esq.

Branch Chief
John Grzeskiewicz, Esq.

Securi ties and Exchange Commission

Di vision of Investment Management

Office of Di sclosure and Review

Robert F. Birch, President

Ellen E. Terry, Vice President

The New America High Income Fund, Inc.

John R. LeCla ire, Esq.

Goodwin, Procter & Hoar

YP-4176/N