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