<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996
REGISTRATION NO. 333-08465
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
AMENDMENT NO. 5 TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CAPITA EQUIPMENT RECEIVABLES TRUST 1996-1
(ISSUER WITH RESPECT TO THE NOTES)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-7097632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
</TABLE>
ANTIGUA FUNDING CORPORATION
(ORIGINATOR OF THE OWNER TRUST DESCRIBED HEREIN)
C/O CT CORPORATION
1209 ORANGE STREET
WILMINGTON, DELAWARE 19801
(302) 658-7581
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
CT CORPORATION
1209 ORANGE STREET
WILMINGTON, DELAWARE 19801
(302) 658-7581
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
COPIES TO:
<TABLE>
<S> <C>
OWEN C. MARX RICHARD M. SCHETMAN
Dorsey & Whitney LLP Cadwalader, Wickersham & Taft
250 Park Avenue 100 Maiden Lane
New York, New York 10177 New York, New York 10038
(212) 415-9285 (212) 504-6906
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
----------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Receivable-Backed Notes.................... $3,075,000,000 100% $3,075,000,000 $1,060,344.83(2)
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457.
(2) Previously paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be incurred in connection
with the offering of the Notes, other than underwriting discounts and
commissions, described in this Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.................. $1,060,344.30
Printing and Engraving............................................... *
Legal Fees and Expenses.............................................. *
Blue Sky Filing and Counsel Fees..................................... *
Accounting Fees and Expenses......................................... *
Trustee Fees and Expenses............................................ *
Rating Agencies' Fees................................................ *
Miscellaneous Expenses............................................... *
-------------
Total............................................................ $ *
-------------
-------------
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Antigua Funding Corporation is incorporated under the laws of Delaware.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any persons, including officers and directors, who
are, or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation, by
reason of the fact that such person was an officer, director, employee or agent
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise).
The indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceedings, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interests and, for criminal proceedings, had no
reasonable cause to believe that his conduct was illegal. A Delaware corporation
may identify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
The Certificate of Incorporation and Bylaws of Antigua Funding Corporation
provide, in effect, that, subject to certain limited exceptions, such
corporation will indemnify its officers and directors to the extent permitted by
the Delaware General Corporation Law.
ITEM 16. EXHIBITS.
The Exhibits filed as part of this Registration Statement are:
<TABLE>
<C> <C> <S>
*1.1 -- Form of Underwriting Agreement.
**3.1 -- Certificate of Incorporation of Depositor.
**3.2 -- By-Laws of Depositor.
**4.1 -- Form of Transfer and Servicing Agreement.
**4.2 -- Form of Indenture.
**4.3 -- First Amended and Restated Trust Agreement.
**4.4 -- Form of Amended and Restated Trust Agreement
**4.5 -- Form of Purchase Agreement.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <C> <S>
**5.1 -- Opinion and consent of Dorsey & Whitney LLP with respect to legality.
*8.1 -- Opinion and consent of Dorsey & Whitney LLP with respect to tax matters.
8.2 -- Opinion and consent of Cadwalader, Wickersham & Taft with respect to tax matters.
**23.1 -- Consent of Dorsey & Whitney LLP (included as part of Exhibit 5.1).
*23.2 -- Consent of Dorsey & Whitney LLP (included as part of Exhibit 8.1).
**23.3 -- Consent of Dorsey & Whitney LLP
23.4 -- Consent of Cadwalader, Wickersham & Taft (included as part of Exhibit 8.2).
**24.1 -- Power of Attorney.
**25.1 -- Statement of eligibility of Indenture Trustee.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 5 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
4th day of October, 1996.
ANTIGUA FUNDING CORPORATION
By ___________/s/ GUY HANDS___________
Guy Hands
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registration Statement has been signed by the following persons in
the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------- ------------------------------------------- ------------------------
<C> <S> <C>
/s/ GUY HANDS President (Principal Executive Officer) and October 4, 1996
Guy Hands Director
/s/ JEFF NASH Vice President (Principal Financial and October 4, 1996
Jeff Nash Accounting Officer) and Director
</TABLE>
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 5 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
4th day of October, 1996.
CAPITA EQUIPMENT RECEIVABLES TRUST
1996-1
By: ANTIGUA FUNDING CORPORATION
By ___________/s/ GUY HANDS___________
Guy Hands
President
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------
<C> <C> <S> <C>
*1.1 -- Form of Underwriting Agreement.
**3.1 -- Certificate of Incorporation of Depositor.
**3.2 -- By-Laws of Depositor.
**4.1 -- Form of Transfer and Servicing Agreement.
**4.2 -- Form of Indenture.
**4.3 -- First Amended and Restated Trust Agreement.
**4.4 -- Form of Amended and Restated Trust Agreement
**4.5 -- Form of Purchase Agreement.
**5.1 -- Opinion and consent of Dorsey & Whitney LLP with respect to legality.
*8.1 -- Opinion and consent of Dorsey & Whitney LLP with respect to tax matters.
8.2 -- Opinion and consent of Cadwalader, Wickersham & Taft with respect to tax matters.
**23.1 -- Consent of Dorsey & Whitney LLP (included as part of Exhibit 5.1).
*23.2 -- Consent of Dorsey & Whitney LLP (included as part of Exhibit 8.1).
**23.3 -- Consent of Dorsey & Whitney LLP
23.4 -- Consent of Cadwalader, Wickersham & Taft (included as part of Exhibit 8.2).
**24.1 -- Power of Attorney.
**25.1 -- Statement of eligibility of Indenture Trustee.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
October 4, 1996
AT&T Capital Corporation
44 Whippany Road
Morristown, New Jersey 07962-1983
Antigua Funding Corporation
c/o CT Corporation
1209 Orange Street
Wilmington, Delaware 19801
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Nomura International plc
Nomura House
1 St. Martin's-Le-Grand
London, United Kingdom EC1A 4NP
Re: Capita Equipment Receivables Trust 1996-1
-----------------------------------------
Ladies and Gentlemen:
You have requested our opinion as to whether the Receivable-Backed Notes
(the "Notes") to be issued by the Capita Equipment Receivables Trust 1996-1 (the
"Trust") pursuant to the Amended and Restated Trust Agreement dated as of
October 1, 1996 (the "Trust Agreement"), between Antigua Funding Corporation,
a Delaware corporation (the "Depositor") and The Bank of New York, as Owner
Trustee, and the Indenture dated as of October 1, 1996 (the "Indenture"),
between the Owner Trustee and The Chase Manhattan Bank (National Association) as
Indenture Trustee, which are described in the Prospectus dated October [ ],
1996 (the "Prospectus"), will be treated as indebtedness for federal income tax
purposes. You have also requested our opinion as to the classification of the
Trust for federal income tax purposes.
<PAGE>
Goldman, Sachs & Co. 2 October 4, 1996
In connection with your request, we have examined (i) the Prospectus,
(ii) certain transaction documents (including the Trust Agreement and the
Indenture), and (iii) such other documents as we have deemed necessary or
appropriate. The opinions set forth below are subject to the following: (i)
all of the parties to the documents we have examined will, at all times,
comply with the provisions of such documents, (ii) the facts and assumptions
and representations stated below are accurate, and (iii) the Notes and other
certificates to be issued by the Trust will be issued and administered in a
manner consistent with the description contained herein and in the
Prospectus. We have also relied in part on certain factual representations
provided to us by the Depositor, AT&T Capital Corporation ("TCC"), Goldman,
Sachs & Co. and Nomura International plc. All capitalized terms used herein
and not defined herein have the meanings set forth in the Indenture or the
Transfer and Servicing Agreement (defined below).
It is our opinion that the creation of the Trust and the issuance
of Notes by the Trust will be treated for federal income tax purposes as the
issuance of indebtedness secured by the assets of the Trust, and that the Trust
will not be treated as an association (or a publicly-traded partnership) taxable
as a corporation for federal income tax purposes. Our opinion in this regard
is based upon the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury regulations promulgated thereunder, and the relevant case law and
administrative pronouncements of the Internal Revenue Service (the "Service"),
all as of the date hereof. We express no opinions other than those expressed
herein.
This opinion is not to be used, circulated or otherwise referred to
without our prior written consent. We hereby consent to the inclusion of
this opinion as an exhibit to the Registration Statement and the reference to
this opinion in the Prospectus. We hereby confirm that the discussion under
the heading "United States Taxation" in the Prospectus accurately sets forth
our advice as to the likely outcome of material issues under the federal
income tax laws.
An opinion of counsel is predicated on all the facts, assumptions, and
conditions set forth therein and is based upon counsel's analysis of the
statutes, regulatory interpretations and case law in effect as of the date of
the opinion. It is not a guarantee of the current status of the law and
should not be accepted as a guarantee that a court of law or an administrative
agency will concur in the opinion.
FACTS
Pursuant to a Purchase and Sale Agreement among the Depositor, TCC, and
four wholly owned subsidiaries of TCC (the subsidiaries, collectively, the
"Originators"), the Originators will (i) assign and otherwise convey certain
equipment lease contracts (the "Lease Contracts"), installment sale
contracts, promissory notes and security agreements, and certain other
chattel paper (the "Loan Contracts"; the Lease Contracts and Loan Contracts,
collectively, the "Contracts"), (ii) assign and otherwise convey the rights
to all payments on the Contracts, and (iii) assign and otherwise convey the
equipment subject to the Lease Contracts (the "Equipment"), to the
<PAGE>
Goldman, Sachs & Co. 3 October 4, 1996
Depositor. (1)
Pursuant to a Transfer and Servicing Agreement, the Depositor will
transfer (i) the Contracts, (ii) the interests in the Equipment that secure
the Loan Contracts, (iii) the right to receive a portion of the proceeds of a
liquidation of the Equipment related to the Lease Contracts, and (iv) the
right to receive the proceeds from a prepayment of a Lease Contract up to a
specified amount, to the Trust, the Trust will issue the Notes to the public
in a registered offering for cash, and the Trust will remit a portion of the
cash proceeds to the Depositor along with the Equity Certificates issued by
the Trust.(2) Goldman, Sachs & Co. and Nomura International plc will act
as underwriters for the Notes.
The Notes are being issued in a form customary for debt pursuant to and
subject to the terms of the Indenture, and provide for principal amounts to be
repaid to Noteholders, with interest at a fixed rate. In the event of a default
in payment of the Notes, the Noteholders will be entitled to the benefit of
certain remedies and rights under the Indenture.
The Equity Certificates represent an interest in the Trust's assets that is
subordinated to the Notes. A portion of the proceeds realized from a
liquidation of the Equipment following default on a Contract will be made
available to fund the Notes and Equity Certificates.
A segregated account (the "Cash Collateral Account" or the "CCA") will be
established as credit support. The Depositor and/or its indirect parent,
TCC, will be entitled to a portion of the cash flow in respect of the Trust's
assets after certain required payments are made.
The Trust will be prohibited from engaging in any business activity
other than (i) issuing the Notes and the Equity Certificates, (ii) holding
and dealing with (including disposing of) the Trust Assets, (iii) making
payments on the Notes and the Equity Certificates, (iv) entering into and
performing the duties, responsibilities and functions required under the
Transfer and Servicing Agreement, the Indenture, the Contracts and related
documents, and (v) matters related to the foregoing.
Pursuant to the Transfer and Servicing Agreement, TCC will service the
Contracts and
- -----------------------
1 Purchase and Sale Agreement (the "Purchase and Sale Agreement") dated as
of October 1, 1996 among the Depositor, as Purchaser, TCC, in its individual
capacity and as Servicer, and the Originators, Section 2.1.
2 Transfer and Servicing Agreement dated as of October 1, 1996 (the
"Transfer and Servicing Agreement"), among the Trust, the Depositor, TCC, in
its individual capacity and as Servicer, and the Indenture Trustee.
<PAGE>
Goldman, Sachs & Co. 4 October 4, 1996
the Equipment to the extent the Equipment secures the Contracts (as such, the
"Servicer"), and will be entitled to a fee for such services. The Servicer
will review the Contract files, monitor and track property and sales taxes to
be paid by lessees, collect payments on the Contracts, repossess and remarket
the Equipment following a lessee default, pay the fees and expenses of the
Trust, manage the funds held by the Trust, make payments into the Trust's
collection accounts for payments on the Notes and Equity Certificates, and
negotiate and accept prepayments from lessees under Lease Contracts. In this
regard, the Servicer will have discretion to permit prepayments based on its
independent business objectives, and may permit prepayments in situations
that are adverse to Noteholders.
The Servicer will pledge a portion of its servicing fee to fund payments
with respect to the CCA.
The Depositor will transfer the Equity Certificates to a second trust,
which will issue certificates to investors for cash in a private placement.
FEDERAL INCOME TAX TREATMENT OF NOTES AS DEBT
It is our opinion that the Notes constitute debt for federal income tax
purposes. The Notes will have all the requisite indicia of debt, an absolute
and legally enforceable obligation to pay a sum certain at a specified
maturity, and, based on the credit ratings for each class of Notes, it is
reasonable to expect that the Notes will be paid in accordance with their
terms. Further, based upon an analysis of the economic substance of the
transaction, the Noteholders do not own the Trust Assets or equity interests
in the Trust, but rather have acquired creditor interests.
FORM OF THE TRANSACTION
The form in which a transaction is cast will be respected if consistent
with its substance, and only in unusual circumstances will debt instruments
such as the Notes not be treated in accordance with their form. SEE, E.G.,
TOWN & COUNTRY FOOD CO. V. COMMISSIONER, 51 T.C. 1049 (1969) (transaction
documented as a financing was respected as such where its form was consistent
with the substance), ACQ. 1969-2 C.B. xxv. The Notes bear all of the formal
indicia of indebtedness: (i) an unconditional promise to repay principal and
pay interest at fixed dates, (ii) collateral provisions with no transfer of
the assets to Noteholders absent default, (iii) conventional creditor
remedies to enforce the payment of interest and principal against the Trust,
(iv) no participation in the management of the Trust or the Depositor absent
default, and (v) provisions that all parties will treat the Notes as
indebtedness for federal income tax purposes.
Courts and the Service have frequently applied a multi-factor test that
is designed to help assess the economic substance of the form chosen. SEE,
E.G., MATHERS V. COMMISSIONER, 57 T.C. 666, 675 (1972), ACQ. 1973-2 C.B. 2;
TOWN & COUNTRY FOOD CO. V. COMMISSIONER, SUPRA; General Counsel Memoranda 39584
(December 3, 1986) and 38147 (October 26, 1979);
<PAGE>
Goldman, Sachs & Co. 5 October 4, 1996
PLR 8149041 (September 9, 1981).(3) Several factors cited in this test focus
on various mechanical indicia such as legal title, collection and servicing
of the collateral, and liability for taxes. The Notes are consistent with
the debt treatment based upon such indicia.
CONTROL OF THE ASSETS
In addition to the more formal indicia noted above, a critical factor in
characterizing a transaction as a loan secured by the pledge of assets is the
degree of control retained over the collateral by the borrower or its agent,
and the lack of such control by the lender. SEE, E.G., MATHERS V.
COMMISSIONER, SUPRA at 675 (transferee's exclusive control over underlying
assets relevant in finding sale of assets). Such control includes the right
to dispose of the assets, the right to service and make collections on the
assets, the taking of other action with respect to assets, and the right to
make investment decisions with respect to the proceeds from the assets. The
Noteholders will not have any formal or practical control over the Contracts
absent default, and there will be no direct or indirect contact between the
Noteholders and the obligors under the Contracts.
Perhaps the most critical element of control over the Contracts and
Equipment is the ability to withdraw such assets and possibly substitute new
collateral of either the same or a different type and of equal or greater
value. In this regard, the Depositor will have the ability to reacquire a
portion of the Contracts through its clean-up call, and TCC, the indirect
parent of the Depositor, will have the ability to accept prepayments based on
its independent business objectives, and even accept a prepayment that is
less than the required amount, and fund the difference.
ECONOMIC SUBSTANCE
In addition to the more formalistic indicia, courts and the Service also
will analyze which of the Noteholders or the Depositor possesses the economic
benefits and burdens of owning the underlying collateral. SEE, E.G., UNITED
SURGICAL STEEL CO., INC. V. COMMISSIONER, 54 T.C. 1215, 1229-30 (1970),
ACQ. 1971-2 C.B. 3; General Counsel Memorandum 39584 (December 3, 1986). Where,
as here, the borrower has retained sufficient economic ownership, and the
creditors have not acquired the substantial incidents thereof, the Notes will
be treated as debt and not as ownership in the underlying assets.
In general, there are four discrete types of risk with respect to these
types of assets: credit risk, market risk, interest rate risk ("reinvestment
risk"), and the economic
- -----------------------
3 Section 6110(j)(3) of the Code provides that private letter rulings and
General Counsel Memoranda may not be relied upon as precedent. Nevertheless,
we believe that the private letter rulings and General Counsel Memoranda
cited herein provide some guidance as to the analysis that the Service has
applied in characterizing asset-backed securities for federal income tax
purposes. All references to section numbers herein are to the Code or the
Treasury regulations issued thereunder.
<PAGE>
Goldman, Sachs & Co. 6 October 4, 1996
volatility of the total return on the Contracts attributable to their
prepayment ("prepayment risk"). The Depositor will bear virtually all, and
Noteholders will bear virtually none, of the credit, market and reinvestment
risks associated with the Trust's assets, which are the three major economic
indicia in this transaction. Further, the retention by the Depositor of a
meaningful economic interest in the Contracts, and the corresponding absence
thereof by the Noteholders, is fundamental in precluding the Noteholders from
being treated for federal income tax purposes as owning the assets. Thus, in
our view, the Depositor will be treated as having retained sufficient
economic benefits and burdens with respect to the Trust assets to continue to
be treated as their owner.
CREDIT RISK. The Noteholders have been shielded from substantially all
of the realistic risk of loss attributable to credit problems on the
Contracts. The Depositor will provide or arrange to provide for credit
enhancement resulting in credit ratings on the Notes between A and AAA. The
associated retained credit risk is expected to be substantial based upon
historical experience.(4)
MARKET RISK. The party who can benefit from or suffer the risk of
fluctuations in the market value of the property has an important attribute
of owning that property. SEE, E.G., UNITED SURGICAL STEEL CO. V.
COMMISSIONER, SUPRA; General Counsel Memoranda 37989 (June 22, 1979) and
34602 (September 9, 1971). In this regard, the courts have identified as
strongly supporting debt characterization the fact that the interest rate on
the loan is set in the debt market, independently of the interest rate on the
underlying collateral. SEE, E.G., UNITED SURGICAL STEEL CO. V. COMMISSIONER,
SUPRA at 1229; YANCY BROS. CO. V. U.S., 319 F. Supp. 441 (N.D. GA. 1970);
TOWN & COUNTRY FOOD, SUPRA. The interest rates on the Contracts and the
Notes will have been set in separate, indentifiable markets.
Ordinarily, the power of disposition is critical to who bears the market
opportunity and risk with respect to the underlying property. Where a lien
is placed on the property for its life, this factor is somewhat neutralized.
The Depositor and TCC can preclude the Noteholders from realizing the
benefit of appreciation in the Contracts through the ability of TCC to accept
prepayments of Contracts. The Depositor and TCC can likewise shield the
Noteholders from the detriment of losses on the Contracts pursuant to an
accepted prepayment where TCC pays the corresponding par
- -----------------------
4 Generally, courts have not treated the retention of credit risk alone as
sufficient to establish a financing where the taxpayer transferred significantly
all of the other economic interests in the underlying assets. SEE, E.G., EAST
COAST EQUIP. CO. V. COMMISSIONER, 222 F.2d 676 (3d Cir. 1955). However, in such
situations, the taxpayer did not demonstrate that the credit rating of the
asset-backed security was significantly better than that of the obligors on
the underlying assets. In appropriate circumstances, retention of credit risk
alone may be sufficient to cause an asset-backed security to be treated as a
debt obligation for federal income tax purposes.
<PAGE>
Goldman, Sachs & Co. 7 October 4, 1996
value of the Notes. This ability to insulate Noteholders from realizing market
value changes in the underlying Lease Contracts pursuant to the ability to
accept prepayments is inconsistent with the Noteholders owning the underlying
Lease Contracts.
In addition, the Depositor retains a clean-up call any time after ten
percent or less of the remaining securities are outstanding. This gives the
Depositor the potential to realize upside on a meaningful portion of the
collateral.
REINVESTMENT RISK. With respect to financial assets, an important element
of the benefits and risks of ownership is how closely payments on the Notes will
track payments received on the collateral. SEE TOWN & COUNTRY FOOD CO. V.
COMMISSIONER, SUPRA. Mismatches with respect to the payment of cash flows can
create a potential for profit opportunity and risk of loss. There are
significant differences between the cash flows on the Contracts and the Notes.
Noteholders will have no interest in or detriment attributable to float or the
early receipt of payments or delinquencies on the Lease Contracts.
PREPAYMENT RISK. Noteholders, and not the Depositor, will generally bear
prepayment risk because prepayments on the Contracts will be used to prepay
principal amounts on the Notes. However, the prepayment risk will be borne
inversely with credit risk (i.e., the Class A Notes will receive principal
payments prior to Class B Notes, but the Class B Notes are subordinated to the
Class A Notes).
SPECIFIC IDENTIFICATION OF COLLATERAL
Another factor that courts and the Service have examined in characterizing
whether debt will be treated as such or as an ownership interest in underlying
collateral, is whether the transaction focuses on particular items of collateral
or the collateral in the aggregate. Where the collateral is dealt with in the
aggregate, this factor has tended to support debt characterization rather than
sale.(5)
PLEDGE OF LEASES
Additional recourse beyond the mere rental streams is a powerful factor
in treating the transfer of lease receivables as a financing. SEE WATTS COPY
SYSTEM, INC. V. COMMISSIONER, T.C.M. 1994-124; COULTER ELECTRONICS, INC. V.
COMMISSIONER, SUPRA. In these cases, the Tax Court held that an assignment of
leases was a secured loan for federal income tax purposes despite, in WATTS, the
transaction's form, and, in both cases, the near identical payment schedules and
asset by asset
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5 Debt has been recharacterized as a sale only where indentifiable,
individual items of collateral can be traced to the terms of the note. COMPARE
COULTER ELECTRONICS, INC. V. COMMISSIONER, T.C.M. 1990-186, AFF'D WITHOUT OP.,
943 F. 2D 1318 (11TH CIR. 1991) WITH BOGATIN V. U.S., 78-2 U.S.T.C. (CCH)
PARAGRAPH 9733 (W.D. TENN. 1978).
<PAGE>
Goldman, Sachs & Co. 8 October 4, 1996
assignments. The fact of additional recourse was especially important.(6) The
additional promises and obligations reflected in the recourse redefined the
nature of the rental stream and rendered the transaction a loan secured by the
leases.
The Equipment will secure payment on the Notes to some extent because a
portion of the value of the Equipment is allocated to the Notes and Equity
Certificates in the event of a Lease Contract default. The Depositor will also
provide other recourse of significant value. Therefore, like the enhancements
in COULTER and WATTS, the Notes contain additional promises that redefine the
nature of the cash flows from the Contracts.
CONCLUSION
Based upon the foregoing analysis, the Notes constitute debt for federal
income tax purposes.
CHARACTERIZATION OF THE TRUST
As discussed above, the arrangement created by the Trust Agreement and
the Indenture will be characterized for federal income tax purposes as debt
secured by the Trust assets. It is our view that as long as the Depositor is
viewed as having all of the interests in the Trust (apart from the Notes),
the Trust Agreement and the Indenture will be more likely viewed for federal
income tax purposes as a mere security device for the issuance of debt and
not as a trust. SEE Rev. Rul. 76-265, 1976-2 C.B. 448; Rev. Rul. 61-181,
1961-2 C.B. 21; SEE ALSO Treas. Reg. Section 1.61-13(b). CF. P.L.R. 8425002
(Feb. 22, 1984). Were the Trust not viewed as a mere security device, the
Trust would be viewed as a grantor trust because it would have a single owner
(I.E., the Depositor). Treas. Reg. Section 301.7701-4. Alternatively, if
any person in addition to the Depositor were viewed to hold an interest in
the Trust (other than the Notes), the Trust would be classified as a
partnership for federal income tax purposes, and not as a "publicly traded
partnership." Treas. Reg. Section 301.7701-2, Section 301.7701-4(c), Section
1. 7704-1 and Code Section 7704.
Very truly yours,
Cadwalader, Wickersham & Taft
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6 COULTER ELECTRONICS, SUPRA ("Continental's potential loss with respect to
any lease was limited by petitioner's contractual obligation to correct any
default on a lease or to reacquire any lease in which a default could not be
corrected."); SEE ALSO WATTS, SUPRA.
