SEC Division of Investment Management staff letter: Queensland Treasury Corporation

SEP 2 6 1995
PUBLIC
Our Ref. No. 95-06-ICR
RESPONSE OF THE OFFICE OF
INVESTMENT COMPANY REGULATION Queensland Treasury Corporation DIVISION OF INVESTMENT MANAGEMENT

(File No. 812-6290)

By letter dated September 22, 1995, you request assurance

that the staff will not recommend enforcement action under the

Investment Company Act of 1940 (the "1940 Act") to ~:he Commission

if Queensland Treasury corporation ("QTC") proceeds with the

transaction described in your letter (the "Stanwell

Transactionfl). In 1986, the commission granted an order

exempting QTC from all provisions of the 1940 Act to enable QTC,

the central financing authority for the State of Queensland

("Queensland"), to issue and sell debt securities in the United

States (the "Order"). 1/ QTC and Queensland agreed in the

application for the Order that Queensland would guarantee QTC' s

debt securities offerings made in the United States. You state

in your letter, however, that QTC, rather than Queensland, will unconditionally guarantee the lease obligations ("ObI igations") that support the debt secur i ties to be issued and sold in the united States in the Stanwell Transaction.

wi thout necessar i ly agreeing with your legal ana lys is, we would not recommend enforcement action to the Commission under

the 1940 Act if QTC proceeds with the Stanwell Transaction

wi thout Queensland's guarantee. Our position is based on the

unique facts and circumstances described in your letter,

particularly that: (1) any offering in the United States will be a private placement pursuant to section 4 (2) of the Securities Act of 1933 (the "1933 Act") i (2) all United States investors

will be institutional "accredited investors" within the meaning a of rule 501(a) of Regulation D under the 1933 Act; (3) only

total of approximately 15 institutional investors are expected to

acquire Obligations and the average investment will be approximately U.S. $10 million; (4) each investor will. be fully informed of the terms of the Order and Queensland will not

directly guarantee the Obligations; (5) QTC either will comply

wi th all the terms of the Order in future offerings of its debt

securities, obtain an amended Order, or determine that another

exclusion or exemption from the 1940 Act is available; and (6)

the difficulty of getting a Queensland guarantee under the facts

and circumstances of the stanwell Transaction.

Our response expresses the Division's position on

enforcement action only, and does not purport to express any legal conclusions on the questions presented. Our posi tion is 1/ The Queensland Government Development Author i ty (subsequent ly renamed Queensland Treasury Corporation), Investment Company Act

Release Nos. 15129 (June 4, 1986) (notice) and 15177 (June 27,
1986) (order) .

based upon the specific facts and representations in your letter,

and different facts or circumstances might require a different

conclusion. ,
*. (' ,\ i', J. - " .. f .J \ , \ \ f' .",' i ¡! r' / ' ")J J .'-/ \T H.R. Hallock, Jr. Special Counsel

september 26, 1995

A.LI'IIUVTf\j, "
OllUid
:B'IO '8
NOLLOSS
ADELPHIA f' EW YORK
MIAMI
PRINCETON
BRUSSE1.S
MORGAN, LEWIS & BOCKrU5
FAx, 12021 467-7176
COUNSELORS AT LAW
1800 M STREET, N.W.
WASHINGTON, D.C. 20036
TEL.EPHONE: 12021467-7000
RECE!V iov
WASHINGTON
Los ANGELES
HARRISBURG
LONDON
FRANKFURT
TOKYO
STEPHANIE M. MONACO SEP 2 5 1995
DIAL. DIRECT 12021467-7192
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", (c. l(/~ ..",' Houghton R. Hallocki Jr" Esq.
~~tt 'tO~ "V".__' __,"'f"-~": Special Counsel

Office of Investment Company Regulation S$.C'l ,.,-'-"~,. S

Division of Investment Management 1\tJ1".:a ,," -, "'-."" ' , . 61.... ",.?-...., ,,:1 ""...."" Securities and Exchange Commission 'ttSlJ'btC" :ßl1~tt~"'''''' . 450 5th Street, N.W. 1\ \1 ~1:L,i~. Washington, D. C, 20549

Subj ect: Oueensland Treasurv Corporation

Dear Mr. Hallock:
On behalf of Queensland Treasury Corporation ("QTC"), we

request the staff's assurance that it will not recommend

enforcement action under the Investment Company Act of 1940

(" Investment Company Act") to the Securities and Exchange

Commission ("SEC") if QTC proceeds with the transaction described

below ("Stanwell Transaction"). In 1986, QTC obtained an order

of exemption ("Order") from all provisions of the Investment

Company Act .1/ The Order was obtained to allow QTC, the central

financing and liability management authority for the State of

Queensland ("Queensland"), to issue and sell debt securities in

the United States. In connection with obtaining that Order, QTC

and Queensland agreed that Queensland would guarantee QTC's debt

securities offerings made in the United States. In the Stanwell

Transaction described below, QTC, rather than Queensland

directly, will unconditionally guarantee the lease obligations

that support the debt securities. On the basis of the unique

facts and circumstances described below, particularly that the

i/ In the Matter of The Oueensland Government Development

Authoritv, Investment Company Act Release Nos. 15129 (June

4, 1986) (notice) and 15177 (June 27, 1986) (order), The

powers of The Queensland Government Development Authority

were expanded in i988 and its name was changed to Queensland

Treasury Corporation by the Queensland Treasury Corporation

Act 1988 (" 1988 Act") .

MORGAN, LEWIS & BOCKIUS

interests to be issued and sold in the United States will be sold

exclusively to accredited investors pursuant to a non-public

offering in the United States, QTC requests the staff's assurance

that it will not recommend enforcement action under the

Investment Company Act if QTC proceeds with the Stanwell Transaction without Queensland's direct guarantee, Descrintion of OTC and Order

QTC, under its previous name, was established under the laws

of the State of Queensland, Commonwealth of Australia on

September 1, 1982 pursuant to the Statutory Bodies Financial

Arrangements Act 1982-84. It was established to act as the

central borrowing authority of Queensland, raising funds for on-

lending to Queensland governmental bodies, QTC follows a number of statutory objectives, including (1) acting as a financial institution for the benefit of and the provision of financial

resources and services to statutory bodies in Queensland, and (2)

entering into and performing financial and other arrangements

that advance the financial interests and development of

Queensland. The 1988 Act vests QTC with the authority, among others, . to borrow, raise or otherwise obtain financial

accommodations in Australia or elsewhere,

. to act as a central borrowing and capital raising authority for Queensland and its statutory bodies i . to act as an agent for statutory bodies in negotiating,

entering into and performing financial arrangements i

and
. to provide a medium for the investment of Queensland funds. Although its status as an investment company was not

completely clear, in 1986 QTC (under its predecessor name)

applied for and obtained exemptive relief from the provisions of

the Investment Company Act. The main arguments made in the

application seeking the relief were that QTC was an agent of a

sovereign government and that it should be viewed as a conduit

for that government in connection with its financing activities.

QTC agreed to certain conditions to obtain this relief, including

the condition that the government of Queensland would

unconditionally guarantee debt securities issued by QTC in the

United States. Compliance with this condition is at issue in the

Stanwell Transaction, described below,

MORGAN, LEWIS & BOCKIUS

Proposed Transaction
QTC proposes to enter into a sale and leaseback type of

financing involving three electrical generating units (each, a

"Unit") comprising part of the Stanwell Power Station, located in

the State of Queensland. An undivided interest in each Unit will

be transferred under a hire purchase arrangement to a number of

trusts (each a "Trust") which will finance the purchase by

issuing two series of Notes equal to approximately 87% of the

cost of the Unit and by an equity contribution from the grantor

of the Trust of the balance of the cost. One series of the Notes

will be issued to a special purpose Pass Through Trust, which

will issue back to back Pass Through Certificates to a small

number of institutional investors (expected to be approximately

15 in total) in a private placement pursuant to Section 4 (2) of

the Securities Act of 1933 (the "1933 Act"). Each United States

investor will be an "accredited investor" within the meaning of Regulation D under the 1933 Act. Although the precise amount is not certain, QTC expects that the average investment made by the

institutional investors will be approximately $10 million,

Upon the hire purchase of the Unit by the applicable Trust,

the following transactions will occur:

i. QTC will lease each undivided interest from the

relevant Trust and will immediately assign its lease

rights and obligations to a special purpose Cayman

Islands company (the "Cayman Lessee") ¡

2. The Cayman Lessee will assign the lease rights (but not

the obligations) back to QTC¡

3. QTC will sublease to Queensland Generation Corporation

(trading as AUSTA Electric), a statutory corporation

constituted pursuant to the Government Owned

Corporations Act ¡ and

4. QTC will unconditionally guarantee the obligations of

the Cayman Lessee under the lease,

The Notes will be secured by a lien on the applicable

undivided interest, by assignments of the lease to the Cayman

Lessee and by QTC' s guarantee of the lease.

~
MORGAN, LEWIS & BOCKIUS

Discussion
Under Section 2 (4) of the 1933 Act, an issuer is defined in

the context of equipment-trust certificates or like securities as

the person by whom the equipment or property is or is to be used.

QTC has the ability to use each Unit itself, or lease each Unit

to others, such as AUSTA Electric. Consequently, QTC comes

within this definition and is therefore deemed to be the issuer under the 1933 Act of the lease obligations ("Obligations"), including the rent that will be applied to service the Notes.

It did not become apparent until the end of last week that

QTC's rights and activities in the Stanwell Transaction that

result in it becoming an issuer under the 1933 Act could lead to

issuer status under the Investment Company Act. Under Section

2 (a) (22) of the Investment Company Act, an issuer is broadly

defined as "every person who issues or proposes to issue any

security, or has outstanding any security which it has issued."

Consequently, because QTC could be viewed as issuing securities

under the Investment Company Act, the conditions imposed by the

Order would become operative. QTC will comply with all of the

conditions imposed in the Order except that it has not obtained

an official Queensland guarantee of the Obligations. As such,

without a Queensland guarantee, it could be argued that QTC is

not complying with all of the terms of the Order. However, on

either of the following two alternative grounds, we request that

relief be granted.

First, QTC believes that its guarantee of the Obligations is

virtually the same as a direct Queensland guarantee, Section 7

of the 1988 Act confers on QTC the status of a representative of the Crown. In fact, Section 7 of the 1988 Act explicitly states that QTC "represents the Crown and, subject to this (1988) Act,

has and may exercise and claim all the powers, privileges, rights

and remedies of the Crown." In addition, under the Crown

Proceedings Act 1980 of Queensland, procedures exist for the

satisfaction of judgments against QTC out of the revenues and

certain assets of Queensland. By virtue of this status, QTC

believes that its obligations are also those of Queensland.

While the guarantee may be said to be indirect through an agent,

any guarantee provided by QTC would be in essence and economic

reality made by Queensland,

Alternatively, we request that relief be granted on the

particular facts presented in this circumstance, including that

(1) any offering in the United States will be non-public pursuant

to Section 4 (2) of the 1933 Act; (2) all United States investors

will be accredited investors within the meaning of Rule 501 (a) of

MORGAN, LEWIS & BOCKIUS

Regulation D under the 1933 Act; (3) only a total of

approximately 15 accredited investors are expected to acquire

Obligations and the average investment will be approximately $10 million; and (4) each such accredited investor will be fully informed of the terms of the Order and that Queensland will not

directly guarantee the Obligations.

We understand that, if relief is granted on either grounds,

such relief will apply exclusively to the Stanwell Transaction.

Should QTC offer debt securities in the future, it will comply

wi th all of the terms of the Order, seek and obtain an amendment

to the Order or determine that it is entitled to rely on another

exclusion or exemption from the Investment Company Act.

Our request on QTC's behalf is of an emergency nature. For

tax reasons, the Stanwell Transaction must close before October

1, the beginning of the last fiscal quarter for many prospective

investors. Indeed, each of the investors that has made a

commitment to participate in the Stanwell Transaction has

conditioned that commitment on the transaction closing no later

than September 30, 1995. This condition has been imposed in

recognition of the "mid-quarter convention" problem presented by

the "40 percent" rule of applicable depreciation rules under the

Internal Revenue Code .'l/
The investments in the Stanwell Power Station are very

significant in size and could, if made during the last three

months of the year, invoke the mid-quarter convention for the

investor. Should this happen, its interest in Stanwell would be

subject to substantially less depreciation in 1995 than if placed

~/ Under the general rule of I.R.C. Section 168 (d), property placed in service by a taxpayer at any time during the

taxable year is depreciated in accordance with the "half￾year convention, II under which all such property is deemed

placed in service on the mid-point of that taxable year

(i. e., July 1 for a calendar year taxpayer), Thus, a half￾year's depreciation can be allowed even for property placed

in service very late in that year. This general rule is

subject to an exception imposed by I.R,C. Section 168 (d) (3) i which provides that, if more than 40 percent of the property

placed in service by a taxpayer during the taxable year is

placed in service during the last three months of that year i

then each property must be depreciated in accordance with

the "mid-quarter convention, II pursuant to which such

property is deemed placed in service on the mid-point of the

quarter in which it is actually placed in service.

MORGAN, LEWIS ~ BOCKIUS

in service before October 1. Even more significantly, such a

post-September 30 investment would probably adversely affect the

i995 depreciation deductions available for all of the property

placed in service by the investor and its affiliates during 1995

by causing all such property to be depreciated under the mid-

quarter convention, rather than the half-year convention.

In short, the Stanwell Transaction, now scheduled to

close on Wednesday, September 27, will probably not close unless we receive the staff's response, at the latest l by close of business on September 26, 1995, The only alternative to going

forward on the basis of the staff's favorable response would be

if QTC were able to obtain a Queensland guarantee, a very

difficult if not impossible alternative at this late date.

Specifically, in order to obtain the government guarantee, the

Treasurer of Queensland must execute the guarantee with the'

approval of the Governor General of Queensland acting with the

consent of the Queensland government executive council. The

Executive Council normally meets every Thursday but a matter

could only be placed on the meeting agenda with two weeks notice.

Given that this concern with the Investment Company Act only

arose approximately one week ago, there was not enough time to

get the matter placed on the agenda. Furthermore, the Executive

Council meeting for next week (September 28, 1995) falls after

the closing date and in any event, we have been informed that the

regular Thursday meeting was cancelled for that date.

Accordingly, we request that the staff consider this request

as soon as possible and, hopefully, issue a favorable response by

September 26. I apologize for the inconvenience created by such

a short time frame and very much appreciate the staff's attention

to this request. Should you have any questions or comments,

please contact me, Michael Thoyer at 212-309-6200 or, for tax

issues, William Macan at 212-309-6290.

Sincerely,
ó4~'f'~i,
Stephanie M, Monaco ~ cc: Elizabeth G. Osterman, Esq.

C. David Messman, Esq.

Michael Thoyer, Esq.

William Macan, Esq.
John Angus

Jon Grayson