§ 1.3

on

Limitations and restrictions purchase of investment securities for bank's own account.

(a) Although the bank is permitted to purchase "investment securities" for its own account for purposes of investment under the provisions of R. S. 5136 and this part, the bank is not permitted otherwise to participate as a principal in the marketing of securities.

(b) The statutory limitation on the amount of the "investment securities" of any one obligor or maker which may be held by the bank is to be determined on the basis of the par or face value of the securities, and not on their market value.

(c) The purchase of "investment securities" in which the investment characteristics are distinctly or predominantly speculative, or the purchase of securities which are in default, whether as to principal or interest, is prohibited.

(d) Purchase of an investment security at a price exceeding par or face value is prohibited, unless the bank shall:

(1) Provide for the regular amortization of the premium paid so that the premium shall be entirely extinguished at or before the maturity of the security, and the security (including premium) shall at no intervening date be carried at an amount in excess of that at which the obligor may legally redeem such security, unless the amortization which would be necessary to meet the latter requirement would not be allowable as a deduction from gross income under applicable Federal Internal Revenue laws and regulations issued thereunder, in which case the rate of amortization shall be sufficient to extinguish the premium by maturity; or

(2) Set up a reserve account to amortize the premium, said account to be credited periodically with an amount not less than the amount required for amortization under subparagraph (1) of this paragraph.

(e) Purchase of securities convertible into stock at the option of the issuer is prohibited.

(f) Purchase of securities convertible into stock at the option of the holder or with stock purchase warrants attached is prohibited if the price paid for such security is in excess of the investment value of the security itself, considered independently of the stock purchase warrants or conversion feature. If it is

apparent that the price paid for an otherwise eligible security reflects the investment value of the security and does not include any speculative value based upon the presence of a stock purchase warrant or conversion option, the purchase of such security is not prohibited. If the price paid for a convertible security provides a yield reasonable similar to that of non-convertible securities of similar quality and maturity, a speculative value will not be deemed to exist.

(g) All investment securities shall be supported by adequate information in the files of the bank as to their investment quality.

[22 F.R. 5628, July 17, 1957]

§ 1.4 Exception to limitations and restrictions.

The restrictions and limitations of this part do not apply to securities acquired through foreclosure on collateral, or acquired in good faith by way of comproImise of a doubtful claim or to avert an apprehended loss in connection with a debt previously contracted, or to real estate securities acquired pursuant to section 24 of the Federal Reserve Act, as amended.

[22 F.R. 5628, July 17, 1957]

(b) The $28,000,000 State Highway Department of the State of Delaware, 48% Delaware Turnpike Revenue Bonds, dated January 1, 1962, are ineligible for purchase by national banks.

(c) The $74,000,000 State Roads Commission of the State of Maryland 48% Northeastern Expressway Revenue Bonds, dated January 1, 1962, are ineligible for purchase by national banks.

(d) The $25,000,000 Town of Cherokee, Alabama, 44% Industrial Development Revenue Bonds, dated March 1, 1961, are eligible for purchase by national banks, within the limitations of paragraph Seventh of section 5136 of the Revised Statutes (12 U.S.C. 24). [27 F.R. 2506, Mar. 16, 1962, as amended at 27 F.R. 6539, July 11, 1962; 27 F.R. 12811, Dec. 28, 1962]

§ 1.6

Texas Turnpike Authority. (a) Request. The Comptroller of the Currency has been requested to reconsider the rulings of June 8, 1955 and March 12, 1962 that the $58,500,000 Texas Turnpike Authority, Dallas-Fort Worth Turnpike Revenue Bonds, Series 1955, dated April 1, 1955, were ineligible for investment by national banks under Paragraph Seventh of 12 U.S.C. 24.

(b) Opinion. (1) The Texas Turnpike Authority was created by an Act of the 1953 State Legislature to construct turnpike facilities within the State, and specifically to build and operate a toll highway between the cities of Dallas and Fort Worth. The instant issue, payable solely from net revenue of the turnpike system, consists of $15 million 2.70 percent bonds due January 1, 1980, and $43.5 million 2% percent bonds due January 1, 1995. In 1955, prior to the construction of the turnpike, this issue was ruled ineligible for purchase by national banks, under the Investment Securities Regulation of this Office. This ruling was reviewed and reaffirmed on March 12, 1962 (27 F.R. 2506.)

(2) The turnpike has been in operation for over five years. Net reserves from its operation have shown a steady rise. Bond interest was covered by 129.6 percent in 1960; 147.0 percent in 1961, and 179.7 percent for the first nine months of 1962. For the same period in 1962, earnings were 128.9 percent of total debt service, up from 106.4 percent for the like period in 1961. The Authority has purchased at discount and retired $934 thousand of its bonds, and on September 30, 1962, had cash and investments totaling $5,984,493. The two year interest reserve requirement has been met.

(c) Ruling. We conclude that the $58,500,000 Texas Turnpike Authority, Dallas-Fort Worth Turnpike Revenue Bonds, Series 1955, dated April 1, 1955, now qualify as "investment securities" within the meaning of Paragraph Seventh of 12 U.S.C. 24. Under 12 U.S.C. 355, this ruling is applicable to state member banks.

[27 F.R. 12811, Dec. 28, 1962]

§ 1.9 Commonwealth of Kentucky, Department of Parks.

(a) Opinion. (1) Request has been made of the Comptroller of the Currency for a ruling whether the $9,900,000 State Property and Buildings Commission of

the Commonwealth of Kentucky Department of Parks Revenue Bonds, Series 1962, are eligible for investment by national banks.

(2) It is proposed to issue $9,900,000 of revenue bonds to finance construction of lodges, cottages, dining facilities and necessary appurtenances thereto in certain of the Commonwealth's parks.

(3) The bonds will be due serially beginning with an amount of $160,000 on April 1, 1964, and increasing yearly until the final maturity date of April 1, 1992, when $622,000 will be due. The coupon has not been decided upon. Bonds maturing after April 1, 1972, will be subject to redemption at certain prices set forth in the Official Statement.

(4) The bonds are being issued by the State Property and Buildings Commission on behalf of the Department of Parks pursuant to the provisions of sections 58.010 to 58.140 inclusive of Kentucky Revised Statutes, as permitted and provided by section 56.450 KRS and a resolution adopted by the Commission and approved by the Department on March 22, 1962. The bonds will be secured pursuant to the terms of the resolution, whereunder the Citizens Fidelity Bank and Trust Company, Louisville, Kentucky, is named as Trustee for the holders of the bonds for the purpose of securing the payment of both principal and interest on the bonds and to secure the faithful performance of the covenants and provisions contained in the resolution.

(5) The bonds are payable from and constitute a first lien upon the gross revenues to be derived from all revenueproducing facilities presently located in the State Parks System or presently operated by the Department and all revenue-producing facilities hereafter constricted, acquired or operated by the Department.

(6) The Department is empowered by section 148.030 KRS to unite into one project for financing purposes all or as many parks, and the improvements thereon, or to be constructed, enlarged or improved, as it deems practicable, so that the fee and charges and other revenue or receipts from every source whatsoever from the parks thus united shall be used for the payment of the principal and interest of all bonds which may be issued. The lien of the bonds for such united project shall be a lien on the gross income and revenue of all of the parks thus united.

(7) The bonds are additionally secured by the obligation of the Commission and the Department to levy an entrance fee subject to certain conditions.

(8) The anticipated revenues and State appropriations appear to be sufficient to provide adequate debt service. The outstanding feature underlying this issue is the ability of the Department to charge an entrance fee if certain conditions occur. Inasmuch as the Department does not presently charge an entrance fee and the present gross revenues of the Department amply cover estimated Debt Service, the covenant to charge such entrance fee adds additional and supplementary security to the bonds.

(b) Ruling. We conclude that the subject bonds are eligible for investment by national banks, within the limitations of Paragraph Seventh of section 5136 of the Revised Statutes (12 U.S.C. 24). [27 F.R. 6539, July 11, 1962]

§ 1.10 City of Kansas City, Missouri. (a) Opinion. (1) Request has been made of the Comptroller of the Currency for a ruling whether the $18,700,000 City of Kansas City, Missouri, 44 percent Airport Revenue Bonds, dated July 1, 1954, are eligible for investment by national banks.

(2) On February 21, 1955, this Office ruled that subject bonds would not be eligible for investment by national banks. Since that date, we have reaffirmed our position several times, the most recent being in December 1959. We have been requested again to re-examine our position relative to these bonds.

(3) The bonds are not general obligations of the city, but are special revenue obligations payable from revenues derived by the city from certain rentals to be paid by Trans World Airlines, Inc. to the city under the provisions of a lease and agreement between the city and the company.

(4) The bonds were issued on July 1, 1954, with interest capitalized until June 30, 1957. The facilities for TWA were completed by January 1, 1957, and the company has been paying the required rental since that date. Payments into the sinking fund from rentals received will be used for the payment of serial bonds and the ultimate retirement of the term bonds.

(5) Rentals received from TWA from January 1, 1957, to April 30, 1961, the date of the latest fiscal report of Kan

sas City, total $5,557,000, which when added to total occupancy permit fees received from TWA from July 1, 1954, to December 31, 1956, of $370,000, aggregate $5,927,000. Interest and fiscal fees on revenue bonds from July 1, 1954, to April 30, 1961, amounted to $5,173,000. The rentals paid for this period were sufficient to provide for the required debt service.

(6) A review of the earnings for the year ending April 30, 1961, reveals that net operating income was 2.19 times the debt service required for the same period. The debt service amounted to $794,750 for this period and the same amount will be required for the period ending in 1962. The first of the serial maturities takes place on July 1, 1962, in the amount of $400,000. Using the earnings figures for the year ending April 30, 1961, this total debt service for 1962 of $1,187,000 is covered 1.47 times.

(7) It should be noted that city ordinance authorizing the bonds required that at July 1, 1962, the Reserve Account have a minimum balance of $2,250,000. The balance at April 30, 1961, was $2,600,000, which is the maximum reserve amount required by the ordinance. This reserve account was built up by rentals collected in excess of debt service charges. Hereafter, all rentals over and above debt service charges will be paid to a sinking fund and applied to purchase or redemption of bonds. It was originally estimated that by the end of the fiscal period in 1962 there would be $180,000 in the sinking fund. However, the figures for the fiscal year ending 1961 showed a balance in the sinking fund of $166,000.

(8) The ordinance also required the establishment of a guarantee fund of $500,000, which has been attained. Another reserve called the operating fund has been established, as required by the ordinance. This fund is to be held for estimated operating expenses of the city's airports for a period of six months in advance. This fund now totals $351,000, while the total operating expenses for the year ending April 30, 1961, amounted to $576,000. In addition there is also a construction fund for extending, constructing, or making general improvements to the airport, which amounts to $939,000.

(9) These various funds have been built by the excess amounts of rental payments not required for debt services.

This fact indicates that the revenue bonds are supported by properly managed operations and finances which are now in a position to cover debt services adequately. However, the strength of the issue lies in the ability of TWA to provide adequate rentals which will ultimately liquidate the issue.

(10) TWA is a subsidiary of Hughes Tool Company, Houston, Texas, which is engaged as a manufacturer of oil-well tools; the production and distribution of motion pictures; and in the manufacture of certain aircraft fuselage parts. As of December 31, 1960, it showed a net worth of $253,800,000, with an important part of the net worth being made up by its investment in TWA.

(11) TWA is a leading airline and is the only United States air carrier authorized to provide service on a scheduled basis on both a transcontinental and transatlantic route system. Principal operations base is located on leased property at Kansas City Municipal Airport, Kansas City, Missouri, and its principal overhaul base is located on leased property at the Mid-Continental International Airport, Kansas City, Missouri. The aggregate annual rental under such leases in effect at March 1, 1961, was approximately $6,250,000. TWA had lease agreements with three other airports besides Kansas City.

We

(12) TWA showed good earnings in 1959 and 1960; however, substantial losses have been reported for 1961. The company has incurred a heavy debt in its program of fleet modernization. have no year-end figures at the present time; however, for nine months ending September 30, 1961, TWA reported total operating revenues were $290,000,000 and a net loss of $12,700,000 as compared to the same period in 1960, when total operating revenues were $290,000,000 and net earnings were $6,100,000. As of September 30, 1961, TWA has cash of $17,600,000 and U.S. securities of $15,900,000, current liabilities of $98,800,000 and a long-term debt of $286,500,000. The latter figure is up from $84,900,000 of a year ago, reflecting additional longterm borrowings in connection with fleet modernization. In this connection, TWA's net investment in property and equipment of September 30, 1961, was $315,600,000 as compared to $204,900,000 the previous year. Tangible net worth of TWA at December 31, 1960, was $124,700,000.

(13) The financial structure in back of the subject bonds has improved to a degree that indicates that the rental payments from now on should be sufficient to cover debt service and provide a margin of safety as well. The financial stability of TWA is believed to be sufficient to provide the necessary rental payments to service the bonds.

(b) Ruling. We conclude that the subject bonds are eligible for investment by national banks, within the limitations of Paragraph Seventh of section 5136 of the Revised Statutes (12 U.S.C. 24). [27 F.R. 6539, July 11, 1962]

§ 1.11

Georgia State Authorities.

(a) Request. The Comptroller of the Currency has been requested to reconsider the ruling of July 12, 1962, that the bonds of various public authorities created by the State of Georgia are not general obligations of the State within the meaning of Paragraph Seventh of 12 U.S.C. 24.

(b) Opinion. The State of Georgia has created, by special acts of its General Assembly, nine public authorities for the purpose of constructing and financing public buildings, bridges, highways, and other public improvements. An Authority has the power to hold property in its own name, to construct projects on land owned by the state, to borrow money for any of its corporate purposes, and to issue its negotiable revenue bonds payable solely from earnings. It does not have the power to levy taxes nor to pledge property other than its earnings. The State Constitution authorizes the State, its institutions and political subdivisions to contract for the long-term use of the facilities of an Authority and requires that appropriations be made sufficient to satisfy the payments required by such lease rental contracts (Art. VII, Sec. VI, Par. I(a)). The General Assembly, in section 46 of the General Appropriations Act of 1961, has made the required appropriation for the current and future years and has provided that payments on lease rental contracts shall constitute a first charge on all such appropriations. The Supreme Court of the State of Georgia has held that payments under such leases constitute obligations of the state for the payment of which the good faith of the state is pledged. It has also held that such lease obligations do not violate the debt restriction and limitation

provisions of the Constitution, and that the constitutional and statutory provisions designed to ensure that state monies will be available to permit payment of the bonds must be read together with those provisions. The net result of the foregoing is that the State of Georgia has solemnly undertaken to provide for the payment of the obligations of its duly constituted authorities.

(c) Ruling. We conclude that the subject bonds are general obligations of the State of Georgia within the meaning of paragraph seventh of 12 U.S.C. 24. [27 F.R. 10251, Oct. 19, 1962]

§ 1.12 New Jersey Highway Authority.

(a) Request. The Comptroller of the Currency has been requested to rule on whether the $40,000,000 New Jersey Highway Authority (Garden State Parkway), Junior Revenue Bonds, Series One, are eligible for investment by national banks.

(b) Opinion. (1) The New Jersey Highway Authority proposes to issue $40,000,000 of revenue bonds to finance (i) a contribution to an Interstate Highway (Freeway), (ii) construction of an interchange of the Garden State Parkway with the Freeway, and (iii) construction of ramps and toll collection facilities in Essex County, New Jersey. Heretofore, the Authority has not been permitted to collect tolls in Essex County, the busiest section of the Garden State Parkway. Under recent legislation the Authority will be able to do so upon payment of $13,000,000 toward the cost of the Freeway.

(2) The bonds are to be dated January 1, 1962, and will mature January 1, 1997. They are to be paid from the tolls and other revenues of the Garden State Parkway. These revenues, however, are first applied to (i) New Jersey Highway Authority State-Guaranteed Parkway Bonds, Series A and Series B, $280,750,000 due serially to 1988, and (ii) New Jersey Highway Authority General Revenue Bonds, $44,320,000 due serially to 1988, and then to the subject bonds. subject bonds are not an obligation of the State of New Jersey or any political subdivision thereof, and no taxing power is pledged to their payment. Net revenues available for debt service for the years 1958 to 1961 have exceeded the estimates projected in 1954 for these

The

years. If the pattern continues, earnings will be sufficient to service the debt requirements.

(c) Ruling. We conclude that the subject bonds are eligible for investment by national banks within the limitations of paragraph Seventh of R.S. 5136 (12 U.S.C. 24).

[27 F.R. 6749, July 17, 1962]

§ 1.13

The Music Center Lease Company, Los Angeles, California.

(a) Request. (1) The Comptroller of the Currency has been asked to rule on the eligibility of $13,730,000 Leasehold Mortgage Bonds of The Music Center Lease Company, Los Angeles, California, for investment by national banks under the provisions of Paragraph Seventh, 12 U.S.C. 24.

(b) Opinion. (1) The Music Center Lease Company is a nonprofit corporation acting for Los Angeles County and is not a municipal authority. Its property, assets, profits and net revenues are irrevocably dedicated to Los Angeles County except that all of its net revenues will be used first to discharge its bonds, debentures or other evidences of indebtedness.

(2) The County of Los Angeles owns certain property in the Civic Center Area of downtown Los Angeles which it has leased to The Music Center Lease Company for a period of 30 years. The Lease Company will construct, in accordance with plans and specifications furnished by the County, a pavilion and related facilities which it will lease to the County for a period of 30 years. The pavilion and facilities are for the use of the public as an auditorium, opera house, music hall and center. The cost of construction is estimated to be about $18,850,000. The Lease Company proposes to issue $13,730,000 in Leasehold Mortgage Bonds to finance the construction of the pavilion and facilities. It is expected that contributions estimated at $6,000,000 will provide the remainder of the financing. The bonds will have serial maturities beginning with $300,000 due in 1965 and gradually increasing to $825,000 in 1991, the final maturity. These bonds have not been publicly offered but will be sold on a private placement basis. There has been no registration with the Securities and Exchange Commission. Internal Revenue