TUI consideration of the expected open market price Sed Debentures. Woods stated that in his opinion, 2 I set price on March 22, 1954, the fixing of the interest * price and redemption prices as indicated above would Y usuren market price of somewhere between $103.50 and $107 pal amount. The Commission, of course, has an exYOU TUY of miting premiums on the issuance of new debt As & Sof principal amount; " but we do not consider that 15 • s appicable in the present case to prevent fixing the in* ACA Conversion price and redemption prices at figures which sand seat in an open market for the Subordinated Debentures beveste und 207. The 234% limitation is based on a desire in the

sses the interest rate of a new security at approximately Qug nacket race in order to facilitate market appraisal of the

It is also related to the fact that redemption prices are Y vided to the public offering price, and that high interest KO SAMPUS Sing well above par do not sell at as favorable yields we dierest rate securities selling at or near par. None of these ALS s proived in respect of the Subordinated Debentures. 2Nd that a non-convertible subordinated debenture of <inde sidee?n to the one proposed by Columbia would, in his opinseo bear an interest rate of from 4% to 44% in order to be The assumed interest rate for the Subordinated Deben

and we fail to see how market appraisal will be faciliColumbia will secure any additional economy in the a va capital by reducing the interest rate or increasing the conAs already noted the redemption prices of the Submures are expected to start at a high of 1032. This ,& ceÌ Cũng) 8 not in any sense related to the expected open market sit the argument that a redemption premium based on sodering price will tend toward prevention of the calling cies sc a time when interest rates may have dropped to a ~ would otherwise make a call economical, does not apply << አ

no circumstances of the present case, we are satisfied se of the Subordinated Debentures does not neces

adverse findings under Section 7 (d). In so so gain point out, however, that Columbia's policy equirements at the holding company level was „ast roha and approved by this Commission as early as s' has been reaffirmed several times since,18 and

ss Company, 27 SEC 275 (1947).

that the only significant securities of the Columbia system which will be held by the public upon completion of the 1954 financing program will be Common Stock, Subordinated Debentures, and Senior Debentures and bank loans. Moreover, we have borne in mind the opinions expressed by Woods as to the relative merits of other possible securities issued by Columbia at the present time. Generally speaking, we do not look with favor upon the issuance of subordinated debt securities or convertible securities by registered holding companies or their subsidiaries, and we would not be inclined to approve them in the future unless we are convinced in a particular case that financing by more conventional securities would not appear to be feasible.

In permitting the declaration to become effective, we are relying in part upon the estimates or ranges of interest rate, conversion price and redemption prices presented in evidence by Woods. Our order will, however, reserve jurisdiction over the right of Columbia to consummate the bidding process until such time as it has obtained from us a further order making effective an amendment to the declaration, which amendment sets forth the interest rate, conversion price and redemption prices actually fixed for the Subordinated Debentures.

Common Stock of Columbia issuable upon conversion of the Subordinated Debentures is without par value. Therefore, such Common Stock is not within the standards of Section 7 (c) (1) of the Act, and its issuance and sale can be permitted only upon our making the findings required by Section 7 (c) (2) (D), or, in the alternative, considering that the issuance of such stock will be for the refunding, exchange or discharging of an outstanding security of Columbia, namely, the Subordinated Debentures, and therefore will be issuable for one of the purposes specified in Section 7 (c) (2) (A). We believe that such Common Stock will be issued for the same purpose as the Subordinated Debentures, and therefore that the purpose of its issuance is well within either Section 7 (c) (2) (A) or Section 7 (c) (2) (D). And we see no reason for any negative finding under Section 7 (d) in respect of such Common Stock.

ACCOUNTING TREATMENT

Columbia proposes to record the Subordinated Debentures on its books at the principal amount thereof. Underwriting compensation may be paid by Columbia to the underwriters, or the underwriters may compensate Columbia for the privilege of underwriting the unsubscribed Subordinated Debentures. Expenses incurred in issuing the Subordinated Debentures, including underwriting costs, if any, will be netted against premiums received on the sale of unsubscribed Subordinated Debentures, if any, and compensation received from the

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17

We turn next to a consideration of the expected open market price of the Subordinated Debentures. Woods stated that in his opinion, based on the market price on March 22, 1954, the fixing of the interest rate, conversion price and redemption prices as indicated above would produce an open market price of somewhere between $103.50 and $107 per $100 principal amount. The Commission, of course, has an expressed policy of limiting premiums on the issuance of new debt securities to 23% of principal amount; " but we do not consider that this policy is applicable in the present case to prevent fixing the interest rate, conversion price and redemption prices at figures which should result in an open market for the Subordinated Debentures between 10312 and 107. The 234% limitation is based on a desire in the usual case to set the interest rate of a new security at approximately the going market rate in order to facilitate market appraisal of the security. It is also related to the fact that redemption prices are generally related to the public offering price, and that high interest rate securities selling well above par do not sell at as favorable yields as lower interest rate securities selling at or near par. None of these elements is involved in respect of the Subordinated Debentures. Woods testified that a non-convertible subordinated debenture of similar duration to the one proposed by Columbia would, in his opinion, have to bear an interest rate of from 4% to 44% in order to be sold at par. The assumed interest rate for the Subordinated Debentures is 334% and we fail to see how market appraisal will be facilitated or how Columbia will secure any additional economy in the raising of capital by reducing the interest rate or increasing the conversion price. As already noted the redemption prices of the Subordinated Debentures are expected to start at a high of 1032. This price obviously is not in any sense related to the expected open market price. Therefore, the argument that a redemption premium based on a high initial offering price will tend toward prevention of the calling of the securities at a time when interest rates may have dropped to a point which would otherwise make a call economical, does not apply in the present situation.

Under all of the circumstances of the present case, we are satisfied that the issue and sale of the Subordinated Debentures does not necessitate our making any adverse findings under Section 7 (d). In so deciding, we would again point out, however, that Columbia's policy of financing system requirements at the holding company level was adopted by Columbia and approved by this Commission as early as 1946, that such approval has been reaffirmed several times since,18 and

See Louisiana Power and Light Company, 27 SEC 275 (1947). "See cases in footnote 8, p. 571.

that the only significant securities of the Columbia system which will be held by the public upon completion of the 1954 financing program will be Common Stock, Subordinated Debentures, and Senior Debentures and bank loans. Moreover, we have borne in mind the opinions expressed by Woods as to the relative merits of other possible securities issued by Columbia at the present time. Generally speaking, we do not look with favor upon the issuance of subordinated debt securities or convertible securities by registered holding companies or their subsidiaries, and we would not be inclined to approve them in the future unless we are convinced in a particular case that financing by more conventional securities would not appear to be feasible.

In permitting the declaration to become effective, we are relying in part upon the estimates or ranges of interest rate, conversion price and redemption prices presented in evidence by Woods. Our order will, however, reserve jurisdiction over the right of Columbia to consummate the bidding process until such time as it has obtained from us a further order making effective an amendment to the declaration, which amendment sets forth the interest rate, conversion price and redemption prices actually fixed for the Subordinated Debentures.

Common Stock of Columbia issuable upon conversion of the Subordinated Debentures is without par value. Therefore, such Common Stock is not within the standards of Section 7 (c) (1) of the Act, and its issuance and sale can be permitted only upon our making the findings required by Section 7 (c) (2) (D), or, in the alternative, considering that the issuance of such stock will be for the refunding, exchange or discharging of an outstanding security of Columbia, namely, the Subordinated Debentures, and therefore will be issuable for one of the purposes specified in Section 7 (c) (2) (A). We believe that such Common Stock will be issued for the same purpose as the Subordinated Debentures, and therefore that the purpose of its issuance is well within either Section 7 (c) (2) (A) or Section 7 (c) (2) (D). And we see no reason for any negative finding under Section 7 (d) in respect of such Common Stock.

ACCOUNTING TREATMENT

Columbia proposes to record the Subordinated Debentures on its books at the principal amount thereof. Underwriting compensation may be paid by Columbia to the underwriters, or the underwriters may compensate Columbia for the privilege of underwriting the unsubscribed Subordinated Debentures. Expenses incurred in issuing the Subordinated Debentures, including underwriting costs, if any, will be netted against premiums received on the sale of unsubscribed Subordinated Debentures, if any, and compensation received from the

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underwriters, if any, and the net balance, if a debit, will be charged to Account 126, Unamortized Debt Discount and Expense or, if a credit, will be credited to Account 170, Premium on Funded Debt. Any such balance of debt expense, or premium, will be amortized over the life of the Subordinated Debentures. In the event of conversion any such unamortized balances of expenses or premium will be debited or credited, as the case may warrant, to income unless the amount is so large as to materially affect income, in which event the debit or credit will be to Earnings Retained.

A further accounting procedure may also be inherent in the case if the conversion price, as finally determined, is one which will not permit the issuance of a given number of full shares in exchange for each $100 principal amount of Subordinated Debentures. It is the intention of Columbia, in lieu of issuing fractional share interests, to pay cash therefor, based upon the then market price of the Common Stock. Columbia proposes to charge to Earnings Retained the excess of cash paid over that portion of the principal amount of a Subordinated Debenture for which no fraction of a common share is being issued. In respect of the Common Stock issuable upon conversion, Columbia proposes to credit to Common Stock capital an amount equal to the stated capital (presently $10 per share) and to credit to Balance of Amounts Paid in Excess of Stated Capital any excess of the conversion price over the amount credited as stated capital. We observe no basis for objecting to the proposed accounting procedure.

CONCLUSION

For the reasons set forth above we have decided to permit the declaration to become effective, subject to a reservation of jurisdiction with respect to all fees and expenses to be paid by Columbia in connection with the financing and to be paid by the successful bidders for counsel; and subject further to a reservation of jurisdiction over the right of Columbia to consummate the bidding process until such time as it has obtained from us a further order making effective an amendment to the declaration, which amendment sets forth the interest rate. conversion price, and redemption prices actually fixed for the Subordinated Debentures.

An appropriate order will issue.

By the Commission (Chairman Demmler and Commissioners Adams, Armstrong, and Goodwin), Commissioner Rowen filing a separate concurring statement.