May 14, 2001
Theodore J. Cohen, Esq.
Spolin Silverman Cohen & Bartlett LLP
The Water Garden
Suite 2000 North
1620 26th Street
Santa Monica, CA 90404
Dear Mr. Cohen:
You inquired in your November 22, 2000 letter about the permissibility under New York Banking Law of a New York-chartered bank (“Bank”) purchasing limited partnership interests in an investment fund (“Fund”) described in your letter.
The Fund would be organized as a Delaware limited partnership. It would be an open-end “feeder” investment fund that invests, through a Master Fund, in a professionally managed diversified portfolio of certain interests (“Loan Interests”) in U.S.-dollar denominated floating-rate senior secured commercial and industrial loans and notes (“Senior Secured Corporate Loans”) which are fully-collateralized by the assets of corporations organized in the United States, its territories or possessions and Canada. The Master Fund typically invests in Senior Secured Corporate Loans where the senior or subordinated debt of the borrowers, if rated by a nationally recognized rating agency, is rated below investment grade.
The Fund is not registered with the Securities and Exchange Commission under the Investment Company Act of 1940. Nor are the LP Interests registered under the Securities Act of 1933. The securities are offered only to “accredited investors” in private placements conducted in accordance with Regulation D under the Securities Act of 1933, as amended.
The minimum capital contribution for each investor is $5,000,000. LP Interests will be initially offered at a price of $1,000,000 per LP Interest and will thereafter be offered at a price equal to the net asset value of the Fund divided by the total number of LP Interests outstanding as of the end of the preceding business day. LP Interests purchased by an investor are subject to a minimum investment period of one year from the date of purchase.
The liability of limited partners is limited in accordance with the Delaware Revised Uniform Partnership Act. Thus, investors in the Fund would be shielded from personal liability for the acts and obligations of the Fund.
In connection with sales to banks, the Fund will agree to furnish investors with information intended to enable banks to conduct an independent credit analysis of the loans and loan participations in which the Master Fund invests, including, but not limited to, quarterly valuations of loans at market value using, where possible, third party pricing sources, quarterly credit rating information, a random sample of loan documents and full credit information for a random sample of obligors. In addition, the prospectus provides that the Fund’s general partner will furnish all limited partners with (i) monthly performance reports, (ii) quarterly unaudited financial statements, including portfolio holdings and (iii) annual audited financial statements. The Master Fund will enter into an agreement with the Fund to provide the foregoing data to the Fund concerning the loans and loan participations in which the Master Fund invests.
We concur with your analysis that, pursuant to New York Banking Law § 2001.2(f), a New York bank may invest in a partnership if the investment is appropriate in conducting the bank’s business and provided the bank has the power itself to engage in the activities being undertaken by the partnership. The Fund is in the business of purchasing loans and loan participations, which are permissible activities for New York banks. Of course, the Bank should follow prudent banking practices in analyzing the underlying credits that comprise the Fund in determining whether investment in the Fund would be prudent for the Bank.
We note, however, that your statement concerning Banking Law § 103 to the effect that New York lending limits only apply with respect to loans New York banks make directly is in error. The legal lending limits contained in § 103 apply to a bank’s loans and extensions of credit to a borrower whether made directly or indirectly. (See e.g., N.Y.C.R.R. Part 36 concerning New York banks’ investments in shares of investment companies). Accordingly, New York banks would need to be able to ascertain whether the purchase of LP Interests would result in the bank’s exposure to a single underlying borrower in excess of the relevant legal lending limits.
I trust that this is responsive to your inquiry.