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F ederal
reserve
bank
DALLAS, TEXAS
of
Dallas
75222
Circular No. 7O-85
April 8, 1970
AT&T DEBENTURES
(REGULATIONS G, T & U)
To All Banks, Broker/Dealers and Regulation G Registrants
in the Eleventh Federal Reserve District:
On the succeeding pages is a letter from Mr. Kenneth A.
Kenyon, Deputy Secretary of the Board of Governors of the Federal
Reserve System, on the applicability of the Board's margin regula
tions (Regulations G, T and U) to the forthcoming issue of American
Telephone & Telegraph Company (AT&T) debentures.
On April 13, 1970, AT&T will issue to its stockholders
rights to subscribe to one of these debentures for each thirty-five
shares of stock held. Each debenture entitles the record holder to
warrants to purchase two additional shares of stock. Further details
are found in the attached letter.
Questions on this matter should be referred to the Regulations
Department of the Federal Reserve Bank of Dallas.
Yours very truly,
P. E. Coldwell
President
Attachment
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
BOARD OF GO VERNO RS
□ F THE
FEDERAL RESERVE SYSTEM
W A S H IN G T O N ,
O.
C.
20551
ADDRESS
OFFICIAL
TO
A p ril
2,
THE
CORRC9PONDE
BOARO
1970*
A number of questions have been raised with the Board of
Governors regarding the applicability to the forthcoming issue of
American Telephone & Telegraph Company (AT & T) debentures of the
B o a r d ’s m ar g in regulations, Regulation G, "Securities Credit by Persons
other than Banks, Brokers, or Dealers,” Regulation T, "Credit by Brokers
and D ea l er s ,” and Regulation U, "Credit by Banks for the Purpose of
Purchasing or Carrying Margin Stock."
Briefly, on Monday, April 13, 1970, AT & T will issue to its
stockholders rights to subscribe to one $100 debenture for each 35 shares
of stock held.
These rights expire on May 18, 1970.
Each debenture will
bear a legend certifying that the record holder is the owner of warrants
to purchase two additional shares of stock which will be issued in de tach
able form in November 1970, to the person who was the holder of record
of the debenture on October 15, 1970.
The warrants may be exercised at
any time between November 15, 1970 and May 15, 1975, when they expire.
It is expected that beginning April 13, the units (debenture
plus warrants), will trade on a when-issued basis.
In addition, some of
the debentures m ay be traded without warrants ("stripped") by means of an
agreement on the part of the record holder to redeliver the warrants when
received in November.
Thus, it can be expected that the debentures and
warrants will also trade separately, initially on a when-issued basis.
Rights, debentures (as a unit including warrants), debentures without
warrants ("stripped” ) and warrants will be listed on the New York Stock
Exchange and other exchanges.
Sections 207.1(d) of Regulation G, 220.4(j) of Regulation T,
and 221.3(t) of Regulation U define a "convertible debt security” to
include any m arg in debt security "carrying a warrant or right to subscribe
to or purchase" a margin security or stock.
The existence of a collateral
agreement obligating the recipient to redeliver the warrants will not
affect the provision of the debenture itself under which the record holder
is entitled to receive warrants exchangeable for stock of AT & T, which
is, of course, a margin security or stock.
Accordingly, the Board of
Governors considers that the debenture will continue to be a convertible
debt security, whether or not such "stripping” agreement has been executed,
until the debenture itself no longer carries the right to receive the
warrant (record date October 15, 1970).
The three regulations provide that convertible debt securities
pledged as collateral for credit extended under §§ 207.1(d) of Regula
tion G, 220.4(j) of Regulation T, or 221.3(t) of Regulation U, shall be
treated as "equity securities" or "convertible debt securities" as long
as continuously so held.
The retention requirements of the three regula
tions apply to withdrawals of securities held as collateral for such credit
(§§ 207.5(c) of Regulation G, 220.8(e)(3) of Regulation T, and 221.4(c)
of Regulation U).
Accordingly, AT & T debentures acquired as convertible
debt securities and held as collateral for such credit cannot be withdrawn,
even after the warrants have been detached, unless 70 per cent of the
current market value of the debenture is deposited to improve the status
of the credit (or such lesser amount as will suffice to bring the credit
into a fully margined status).
Customers newly acquiring the debentures and becoming holders
of record after October 15, 1970, will not be entitled to receive the
warrants and can pledge the debentures as collateral for credit under
§ 220.4(i) of Regulation T or § 221.3(s) of Regulation U.
Collateral
eligible for such credit is entitled to good faith loan value.
Credit
extended to such customers is not "purpose credit" under Regulation G.
Very truly yours,
Kenneth A. Kenyon,
Deputy Secretary.
@FedFRASER