May 4, 1999
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File No. S7-7-99
Comments on Release Nos. 33-7649; 34-41118
Financial Statements and Periodic Reports for Related Issuers and Guarantors
Dear Mr. Katz:
On behalf of Reynolds Metals Company, we respectfully submit the following comments in response to the Commission’s proposed rules regarding Financial Statements and Periodic Reports for Related Issuers and Guarantors.
We agree with the staff that the codification of interpretive practice provides significant benefits to registrants and the financial community. However, we do not agree with all of the staff’s conclusions. We believe the objective should be to elicit full and fair disclosures regarding issuers and guarantors in a format that is meaningful to investors and not unduly burdensome to registrants. We do not believe the proposal to require condensed consolidating financial information in all situations not involving a finance subsidiary meets these objectives.
In our case, we have two wholly owned, Canadian subsidiary issuers that are co-obligors on debt securities that are fully and unconditionally guaranteed by the parent company. The debt securities require annual principal repayments of $57 million between 1999 and 2002. The parent company, a Delaware corporation, is the world’s third largest aluminum producer and a reporting company under the Exchange Act. In reliance on staff no-action letters we obtained in 1993 and 1995, we provide summarized financial information for the two subsidiary issuers in the parent company’s Exchange Act reports. The subsidiary issuers’ operations are vertically integrated with those of the parent company and its other subsidiaries. More specifically, the subsidiary issuers’ principal raw materials are purchased from the parent company and its other subsidiaries and most of their products are sold to the parent company and its other subsidiaries. The subsidiaries are operated and managed as part of an integrated business enterprise and their financial position, including cash flows, is inextricably linked with that of the parent company. While the subsidiary issuers have more substance than the typical finance subsidiary, it is difficult to see how any reasonable investor would make an investment decision about the subsidiaries’ debt securities based on anything except the credit worthiness of the parent company as guarantor. In our view, summarized financial information about the subsidiary issuers is more than adequate.
We agree with the staff’s current practice regarding complex securities and corporate structures. In these situations, we believe additional financial information is valuable to investors. We also agree with the staff’s current practice regarding those simpler structures (such as ours) that were specifically contemplated in SAB 53. In these situations, we believe investors look at the financial status of the parent company guarantor to evaluate the likelihood of payment. For this reason, we believe the SEC should also codify the current practice for these simpler structures. The presentation of any information in addition to summarized financial information would not be meaningful to investors and costly and burdensome to registrants.
We have serious concerns regarding the proposed rules’ potential disclosure of competitive information. In our case, we would be required to disclose a great deal of disaggregated financial information about one of our most strategic assets, a Canadian primary aluminum smelter. We believe this information could harm us commercially and competitively while not providing information needed by an investor to make an investment decision. If we had known of a requirement to disclose this competitive information at the time of the subsidiaries’ debt issuance, we would have chosen an alternative source of financing.
We question whether the staff’s cost estimates are representative of the registrants that will be affected. In our case, the costs and time required to prepare condensed consolidating financial statements will far exceed the staff’s sixteen-hour estimate. Our initial estimate is 5 to 6 man-weeks each quarter. After costly system development, we believe that effort could be reduced to 3 to 4 man-weeks per quarter. We will also incur additional audit costs.
Further, we do not believe the staff’s aggregate cost calculation is reasonable. The calculation involved only those twenty-nine registrants granted no-action relief in 1997. We believe this calculation should be based on all registrants that are currently permitted to provide summarized financial information.
Grandfathering and Phase-In Period
If the staff does not agree with our positions, we would ask the staff to give consideration to grandfathering certain fact patterns such as ours where summarized financial information under SAB 53 is more than adequate or allow a substantial phase-in period. We believe grandfathering is particularly appropriate in our case since the investors in our subsidiaries’ debt securities purchased the securities with the full knowledge that only summarized financial information for the subsidiary issuer would be provided in the future. This was disclosed in the Prospectus dated June 4, 1993 relating to the debt securities. In the future, we will not issue debt securities that would require the disclosure of competitive information.
We appreciate the opportunity to comment on these proposals.
Very truly yours,
Allen M. Earehart
Senior Vice President