Mathieson Chemical Corp., as shown in the attached annual report for 1951, has experienced a very major expansion during the past 4 years. It has also created two major affiliated companies, one of which was in a new industry. To accomplish this expansion of almost 300 percent in every category, it has also been necessary to carry out a broad financing program in which we have used both financing routes: private placement and public offering. It is our opinion that under today's conditions each method is supplementary to the other, and that borrowers should have available to them both sources of capital. As an example, we (and our affiliates) have in slightly over 3 years: (a) Borrowed $50,000,000 through private placement, of which $46,000,000 was borrowed from insurance companies. This has involved seven different transactions. (b) Sold $18,000,000 of convertible preferred stock, through a large underwriting syndicate. (c) Purchased two companies and the publicly held portion of one affiliate with common stock. Without both sources of capital, it is doubtful if we should have been able to accomplish this growth in the short period under review. Specifically referring to the private placement market, I believe I can give you some of our own experiences, which should illustrate the great advantage to us of this method of financing: 1. Flexibility This to us is one of the greatest features of private placement. As mentioned above, the borrowing of $50,000,000 involved seven distinct 'transactions, and several amendments to original restrictions in the notes or mortgage indentures. Over and above the actual borrowing of funds we also have had: (a) An agreement to lease a plant from the United States Government, during the negotiations for such lease, which lasted less than a week. Inability to clear the transaction with debt holders quickly would have seriously impaired our chances of getting this lease. (b) Sale of a plant, under mortgage by one company, to another without mortgage. (c) Additional financing of one company under the same terms and conditions as the original loan. The expansion of these plants and elimination of operating bottlenecks had to be done in a very short period of time. Any delay would have seriously affected the success of the entire venture. (d) Agreement to refund all debt upon the merger of two companies. This was a major undertaking involving three issues of varying coupon rates, and with different security and restrictions. Without complete commitment prior to merger, the latter could not have been accomplished, although the refunding could not become effective until after the merger became effective. Both public issues and private placements would have had substantially similar restrictions for the protection of the security holders and the company. They were written in the light of conditions as seen when the financing was negotiated. Conditions change, however, and in a growth industry such as ours, the change is often rapid. Plants are needed speedily by defense requirements; changes in output, size, or design are requested by Government or dictated by our own experience; governmental restrictions change costs and materials available. In our case we have additionally experienced increased costs of construction, change in demand for ultimate products, variations in plant scope, and many expansions during construction. Any rigidity in being able to shift our course or to have secured added financing or changes of indentures would have seriously delayed our operations, reduced our contribution to the national defense effort, and hurt our financial returns. By frequent reference to the experts in the lending institutions, and because of their resultant intimate knowledge of our business, we have been able to place our problems before them, negotiate on the spot, secure a quick and positive answer, and proceed with our operating necessities with a minimum of delay, and with definite assurance. Had these debt securities been held by scattered bondholders, it would have required numerous approvals which would have been difficult to obtain from such owners. These holders of bearer securities would probably not be readily identifiable and therefore difficult to contact. It would also have required seréral registrations with the SEC, and possibly even calling one or more issues, and placing others in the market. It is obvious that such a procedure would have been burdensome, costly, and time consuming. Much of which we were able to accomplish would not have been done at all. 2. Cost of placement The cost of private placement in every case has been substantially less than would have been the case if we had financed publicly: (a) Frequent changes described above were carried out with only minor expenses for legal, auditing, and printing. (b) Direct negotiation between the corporation and the insurance company has been used, although investment bankers have also acted as intermediaries, but in either case the cost has been negligible compared to full underwriting costs. (c) The direct placement loan method does not require the take-down at one time, thus saving substantial interest payments, in the case of borrowings made for construction and development. 3. Rate assurance In financing a corporation, one of the more important factors is the assurance of total return on an issue, the coupon rate, and availability of funds. It is impossible to secure these in public financing until the issue has come out of registration and the market has been judged 1 or 2 days prior to public offering. This can effect a delay of from 3 to 6 weeks, which can be extremely important. 4. Growth company financing While the above-mentioned factors are important in greater or lesser degree to all companies, the floating of an unseasoned security of a company in a new industry or of a growth company is a difficult problem in the public market. The security itself may be intrinsically just as sound as another, but it does not have the record behind it to command price, or distribution, or interest rate. 5. Time element Even the simplest arrangements must be negotiated with both private or public buyers. Once negotiated, however, the private placement is ready for settlement, while public financing still requires several weeks for registration and public offering. We repeat that we do not believe that private placement is the only method of financing corporate enterprise. Each supplements the other; we have used both and shall continue to do so. However, it would be extremely disturbing to us, were the private placement market closed to us, or needlessly complicated by the requirement of registration. As a company in a rapidly changing and expanding industry, we need the flexibility, savings in costs and time, and close association with the security holders. The availability of investment funds varies widely from time to time. Industry, taxed to a point where it is impossible to finance replacement or expansion of plant out of retained earnings, must have open to it every possible source of sound capital, and should not have one or another source closed or limited by action of law. So far as registration is concerned, even if the time required and the cost did not rule out such a plan, it seems completely unnecessary to "protect the investor" in this case, as it might be in public offering. The existing private buyer, be it an insurance company, a pension fund, or a trust, is by experience in the investment field and by existing statutory and common law regulation probably the most thoroughly protected investor that exists. The above comments express our views in this important matter. Should you desire any further data, we should be glad to supply it to you. Sincerely yours, S. DE J. OSBORNE. Hon. LOUIS B. HELLER, PITTSBURGH STEEL CO., Pittsburgh, Pa., May 12, 1952. Chairman, Special Subcommittee on the Securities and Exchange Commission, Interstate and Foreign Commerce Committee, House of Representatives, Washington, D. C. DEAR SIR: The April 17, 1952, article in the Commercial and Financial Chronicle and the April 23, 1952, issue of the Congressional Record indicated that your committee will hold hearings on May 20 and 21 with respect to the private placements of funded debt. We understand that suggestions have been made to the effect that "private placements" be subjected to registration with the Security Exchange Commission, similar to that followed in the case of public offerings. Last year we completed arrangements with respect to the financing of a $56,000,000 expansion and modernization program which involved private placements and which we know now could not have been satisfactorily consummated if we had found it necessary to resort to a public offering in accordance with the regulations as prescribed by the Securities Exchange Commission. In view of the public knowledge of the activities of your committee and the importance of this issue to industry, it is felt that we should review our particular case for you. Our company is an integrated steel company, ranking fourteenth in size in the United States. It manufactures pig iron, semifinished steel, wire and wire products, seamless tubular products, and cold-rolled strip steel. The company employed an average of 9,600 employees in 1951. Our net sales last year were $149,255,271, and our net income after all charges, including income taxes, was $7,331,599. Total assets of the company amount to approximately $112,000,000. We are, nevertheless, a small company in the steel industry and are subject generally to the problems of small companies. Our company was formed in 1901, had a splendid growth in the first 20 years of its existence, did reasonably well through the 1920's, but had a questionable earnings record from 1929 to 1936. During this last period, the plant suffered from inadequate repairs and maintenance and insufficient investment in new equipment. From 1936 to 1950, the company made progress in improving its plant and properties, but was handicapped because of its previous bad earnings record, in its financing. When I became associated with the company early in 1950, I was shocked to find that it had a surplus of semifinished products (ingots) to sell and that it was short of finishing facilities. This meant that a major operation was indicated which would involve the installation of costly equipment for the production of hot- and cold-rolled sheets so as to effect diversification of product. Concurrently we planned to increase our steelmaking capacity by approximately 50 percent. This afore-mentioned program contemplated the expenditure of approximately $56,000,000. While the financing of this would be facilitated by certificates of necessity, the purpose of which is to increase steel-making capacity, we realized that a major part of it would have to be financed by a bond issue of at least $25,000,000. The difficulty that the company had had earlier in selling its $6,500,000 bond issue, at an interest rate of 44 percent, to the public, indicated the kind of difficulty that was inherent in a public financing. It was therefore decided that the financing should be accomplished, first, by obtaining a large loan from one of the insurance companies and, second, by borrowing certain long-term funds from some potentially large customers of the company. We approached the Metropolitan Life Insurance Co., whose officers went through our proposal with a fine-toothed comb. Fortunately, the men that we dealt with knew the steel business and had had sufficient experience with loans to steel companies in the past to be well aware of the advantages inherent in our program of expansion and diversification. In August of 1951, we entered into an agreement with the insurance company whereby they agreed to loan us $25,000,000 for 20 years at 34 percent interest on first-mortgage security. They agreed to permit us to borrow $5,000,000 from banks on term loans to extinguish the balance of the loan incurred in 1948 and agreed further to permit us to enter into long-term loan agreements tied in with sales options to two prospective customers for our new products, which are both well known automobile companies. The advantages of refinancing by means of this private placement, based on our experience, have been as follows: 1. We gained certain definite benefits by not being required to register under the Securities Exchange Act of 1933.-The principal benefits of this were (a) It was necessary for us to furnish only information that the insurance company as an experienced investor required in appraising securities. By working at first hand with the investor, information was transmitted directly and quickly. It follows that the not inconsequential expense of preparing a registration statement was eliminated. (b) No time was consumed after reaching an understanding with the lender for the preparation of a registration statement and the necessary amendments thereto. (c) No risk of experiencing a bad market was involved during the period of waiting that would have been necessary in the case of a registration statement. As soon as negotiations were completed, the purchase agreement was entered into, the money was committed, and we could proceed immediately with the placement of orders for our new mill. 2. Interest is saved.-Our program of expansion was estimated to cover a period of 2 to 21⁄2 years. Under our agreement with the insurance company, we were able to make arrangements to take down the money for plant construction in quarterly periods beginning in December 1951, in $5,000,000 installments. If we had engaged in public financing, it would have been necessary to take the entire amount of money down at one time and to bear the extra interest burden during the period before the funds were actually needed. 3. Changes in the construction program may be more readily made.-Approval for changes can more readily be obtained from one lender if the proper facts are submitted than would be possible in the case of a public offering with many participants. 4. There is less risk if costs should overrun estimates.-We would be able to sit down with one lender and discuss the proper change to be made to meet unforeseen conditions, a procedure which would be virtually impossible to accomplish in the case of a public offering. For such reasons as these, I am deeply impressed with the importance of private or direct placement of loans in the financial structure of our industry. If wa had tried to place the loan as a public offering, we would very probably have had difficulty in obtaining a loan of this size in view of the company's spotty earnings record. Furthermore, if we had failed to obtain a sufficiently satisfactory rating for the bonds, a public financing of the amount involved for our company might well have proved impossible. These risks were eliminated by dealing directly with an institutional investor able to take a long-range view of the fundamental soundness of a situation uninfluenced by temporary market conditions. The foregoing facts are for your record, and to us they prove (1) that, if the avenue to private placements had been blocked by regulations which might stem from suggestions made to date to your committee, Pittsburgh Steel Co. could not make the contribution that it is now making in the interest of our economy and the defense program, and (2) the woods are full of similar cases and particularly where small companies are involved. Although this letter states our position, I am willing to appear as a witness before your committee if it would prove to be helpful. Yours very truly, AVERY C. ADAMS, President. UNITED STATES HOFFMAN MACHINERY CORP., Hon. LOUIS B. HELLER, Washington, D. C. DEAR SIR: It is my understanding that your committee is giving its attention to the matter of direct financial placements. I urge that nothing be done to disturb or impede the ability of American business to continue to make use of the direct placement of securities. This method of financing in my opinion has become the easiest and most flexible means by which private enterprise can obtain long-term capital. The United States Hoffman Machinery Corp. manufactures garment-pressing, dry-cleaning, and laundry equipment. Although a leading factor in our field, we are a medium-size company by today's standards, and our net worth is $12,000,000. Our business is highly cyclical in character, and profit margins are not large. Sales and earnings show wide periodic fluctuations, the effects of which are reflected in the fact that our combined stock capitalization on the New York Stock Exchange is valued at only $6,400,000. Public financing, particularly through the sale of equity securities, is therefore difficult. In 1946, in order to obtain funds for working capital and plant expenditures, 30,000 shares of 42 percent cumulative stock were sold at a price of 101 to the public to yield 4.21 percent. Underwriting commissions and other expenses in connections with this financing amounted to $85,000. In the early part of 1948 our company was faced with the necessity of obtaining additional long-term capital to replace in part current bank loans outstanding in the amount of $8,500,000 that had been incurred primarily to carry the time receivables of dry-cleaning and laundry customers. At that time the preferred stock, which had been sold at 101 less than 2 years previously, was selling at 72 to yield 5.90 percent, and our common stock, on which no dividends were then being paid, was quoted around 14. Obviously, equity financing at that time would have been extremely difficult, if possible at all, and sale of debt publicly would have been expensive. Negotiations were started with a life-insurance company which, as an informed investor, readily understood the special conditions prevailing in our business. Within a relatively short period of time we completed arrangements for a $4,000,000, 15-year loan at an interest rate of 3.50 percent. The direct placement was made with a minimum of trouble and at nominal cost. I find it difficult to see where registration of the $4,000,000 term loan would have served any useful purpose for either the lender, the investing public, or our company. The close and continuing relationship that we have been able to maintain with one holder of our long-term debt would have been impossible with the numerous and scattered owners of a publicly distributed issue. This association has been of benefit to us and to the insurance company involved. Should you desire any further amplification of my views, either by an additional statement or an appearance before your committee, I would be pleased to comply with your request. Very truly yours, ALBERT C. BRUCE, President. Hon. LOUIS B. HELLER, FRUEHAUF TRAILER CO., Securities and Exchange Commission Subcommittee, House Interstate and Foreign Commerce Committee, Washington, D. C. DEAR SIR: In connection with the consideration by your committee of direct placements, I wish to place before you my views on this subject, for the reason that it is a matter in which my company is vitally interested. We are engaged in the manufacture of trailers and, as such, we are suppliers of basic equipment to thousands of truckers, carriers, and businesses involving overthe-road transportation, of all types and degrees of size. The modern trailer is a substantial item, and its cost is not small. Our customers, as a group, require financing in connection with their acquisitions of new equipment. In 1949, we, recognizing that the discounting of customers' paper with banks was not a complete answer to the credit problem in our business, initiated discussions with an insurance company for the purpose of arriving at an adequate and permanent solution of this problem. After months of joint effort we were successful in developing a procedure through the formation of Fruehauf Trailer Sales, Inc., and the issue of debt securities secured by lien on customers' obligations (chattel mortgages and conditional sales contracts) which was mutually acceptable and which provided a satisfactory basis for a permanent financing. At the same time it was recognized that our efforts represented pioneering, that not all contingencies could be foreseen, and that changes would doubtless be necessary from time to time. In October 1948, the insurance company entered into an agreement to lend $30,000,000 to Fruehauf Trailer Sales, Inc. This amount was made available, as required in 11 separate advances over a period of 14 months. In February 1950, $10,000,000 of additional debt was authorized and similarly placed over the next 4 months. In June 1950, December 1950, and May 1951, further additional amounts of $15,000,000, $15,000,000, and $10,000,000, respectively, were authorized and arranged to be placed with the same insurance company. In each ease the increase in the amount of the issue was effected pursuant to supplemental indenture. In addition, over this period of about 3 years, we have had a substantial number of occasions to modify particular aspects of our fundamental arrangement with the consent of the insurance company. Thus, within approxi |