|February 10, 2004|
David Teitelbaum, Esq.
Dear Mr. Teitelbaum:
This is in response to your letters on behalf of Merrill Lynch Bank USA, Salt Lake City, Utah ("ILC"), requesting an exemption from section 23A of the Federal Reserve Act and the Board's Regulation W that would permit ILC to acquire all the capital stock of its affiliate, Merrill Lynch Private Finance, Inc., Plainsboro, New Jersey ("MLPF").1
You have indicated that Merrill Lynch & Co., Inc., New York, New York ("Merrill Lynch"), proposes to reorganize certain of its lending operations by transfering all the stock of MLPF, a nonbank subsidiary, to ILC, an industrial loan company subsidiary that is subject to section 23A. MLPF is principally engaged in the business of originating and servicing loans secured by investments held in securities accounts maintained with Merrill Lynch's broker-dealer subsidiary. Upon origination, MLPF sells its loans to Merrill Lynch International Finance, Inc., another nonbank subsidiary of Merrill Lynch. MLPF continues to service these loans. ILC also originates and services securities-based loans, but ILC keeps these loans on its balance sheet.
Prior to ILC's proposed acquisition of MLPF, MLPF intends to repurchase from Merrill Lynch International Finance up to [amount redacted] of uncommitted credit facilities (the "Credits"), including outstanding loan balances of [amount redacted], that MLPF previously originated and sold to Merrill Lynch International Finance. The purchase price for the Credits would equal [amount redacted] -- the book value of the Credits. MLPF would fund the purchase by borrowing [amount redacted] from Merrill Lynch on an unsecured basis at a floating rate equal to [rate redacted].2 Once MLPF has repurchased the Credits, Merrill Lynch would contribute all of MLPF's capital stock to ILC, and MLPF would become an operating subsidiary of ILC.
Section 23A and Regulation W limit the amount of "covered transactions" between a bank (including an insured industrial loan company like ILC) and any single affiliate to 10 percent of the bank's capital stock and surplus and limit the amount of covered transactions between a bank and all its affiliates to 20 percent of the bank's capital stock and surplus. "Covered transactions" include a bank's purchase of assets from an affiliate and a bank's extension of credit to an affiliate. The statute and regulation also require a bank to secure its extensions of credit to, and certain other covered transactions with, affiliates with prescribed amounts of collateral. In addition, section 23A and Regulation W prohibit a bank from purchasing low-quality assets from an affiliate.
Regulation W provides that a bank's acquisition of a security issued by a company that was an affiliate of the bank before the acquisition is treated as a purchase of assets by the bank from an affiliate if (i) the company becomes an operating subsidiary of the bank as a result of the transaction and (ii) the company has liabilities at the time of the acquisition.3 MLPF is currently an affiliate of ILC; MLPF would be an operating subsidiary of ILC immediately after the reorganization; and MLPF would have liabilities at the time of the reorganization. Accordingly, Merrill Lynch's transfer of all the capital stock of MLPF to ILC would be an asset purchase subject to the quantitative and qualitative limitations of section 23A and Regulation W. The Regulation W value of the covered transaction would be approximately [amount redacted] -- the total liabilities of MLPF at the time of the reorganization.4
To facilitate the reorganization, ILC has requested an exemption from section 23A and Regulation W to permit ILC to acquire all the stock of MLPF. Section 23A and Regulation W specifically authorize the Board to exempt, in its discretion, transactions or relationships from the requirements of the statute and rule if the Board finds such exemptions to be in the public interest and consistent with the purposes of section 23A.5
The Board has in the past approved exemptions under section 23A for one-time asset transfers that are part of a corporate reorganization and that are structured to ensure the quality of the transferred assets.6 As in previous cases reviewed by the Board, the proposed transaction in this case is a by-product of a one-time corporate reorganization. Merrill Lynch is consolidating its securities-based lending and servicing business into ILC. According to Merrill Lynch, this exemption is expected to enhance the efficiency of Merrill Lynch's lending programs and to contain or reduce the operating expenses of the programs.
ILC has stated that none of the Credits is an extension of credit to an affiliate of ILC. ILC also has indicated that none of the Credits is a low-quality asset (as defined in Regulation W) and that ILC will not, as part of the transfer of MLPF shares, purchase any low-quality assets from an affiliate for purposes of Regulation W. In addition, the directors of ILC have reviewed and unanimously approved the transaction. Moreover, for a two-year period following the contribution of the MLPF shares to ILC, Merrill Lynch will either (i) make quarterly cash contributions to ILC equal to the book value, plus any write-downs taken by ILC, of any transferred assets that become low-quality assets during the quarter; or (ii) repurchase on a quarterly basis, at a price equal to the book value, plus any write-downs taken by ILC, any transferred assets that become low-quality assets during the quarter.
In light of these considerations and all the facts you have presented, the reorganization transaction appears to be consistent with safe and sound banking practices and on terms that would ensure the quality of the assets transferred. Accordingly, the transaction appears to be consistent with the purposes of section 23A, and the Director of the Division of Banking Supervision and Regulation, pursuant to authority delegated by the Board, and with the concurrence of the General Counsel, hereby grants the requested exemption.
This determination is specifically conditioned on compliance by ILC, MLPF, and Merrill Lynch with all the commitments and representations they made in connection with the exemption request. These commitments and representations are deemed to be conditions imposed in writing by the Board in connection with granting the request and, as such, may be enforced in proceedings under applicable law. This determination is based on the specific facts and circumstances surrounding the proposed transaction, and may be revoked in the event of any material change in those facts and circumstances or any failure by ILC, MLPF, or Merrill Lynch to observe any of its commitments or representations. This grant of exemption does not represent a determination concerning the permissibility of any other transactions engaged in by ILC, MLPF, or Merrill Lynch that are subject to section 23A or Regulation W.
(Signed) Robert deV. Frierson
|cc:||Federal Reserve Bank of New York|
|Federal Deposit Insurance Corporation|
2. Because the pre-reorganization loan from Merrill Lynch to MLPF is being made in contemplation of MLPF becoming an operating subsidiary of ILC, the loan would be treated as a loan by an affiliate to a bank and, accordingly, would be subject to the market terms requirement of section 23B of the Federal Reserve Act.Return to text
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