Document 9pZGEx6kVVmZ1ebzyDgzNKkR

WRG noil50 April 24, 1973 02092666 f, PtAINTIff'S I EXHIBIT v ( mzmora::dum to the board Subject: Construction Products Division Hew Verniculite Mill - Libby, Montana Industrial Development Revenue Bonds SUMMARY Authorization is requested to finance $5,950,000 of the new $7,600,000 mill at Zonolite's Libby, Montana verniculite nine with Industrial Development Revenue Bonds (IDRB's). W. R. Grace & Co. has received a ruling from the Internal Revenue Service confirming that interest incone earned on IDRB's used to finance $5,950,000 of the nev mill would be exempt from federal income taxes provided the IDRB's are issued in the name of Lincoln County, Montana. Under today's market conditions, the IDR3' s would carry a coupon rate of 5 7/85 per annum which compares favorably to a coupon rate of approximately 7 7/85 per ar.r.u". : a conventional industrial bond of similar maturity. The favorable intv rate differential on the tax-exempt IDRB's would provide an interest saving tr W. R. Grace & Co. of approximately pre-tax $119,000 a year. The IDRB's would be issued for a period of 25 years with principal payments beginning in year 11, resulting in an average life for the IDP-B's of about 19 years. V. D. Grace & Co. has the necessary leeway under its Senior Loan Agreement (the "Met" Agreement) to accommodate this financing. BACKGROUND On May 10, 1971 and November 2, 1972 the Board approved Construction Products RCA's //12 and #12-1 which reauested authority to construct for $7,600,000 a new mill at Zonolite's Libby, Montana vermiculite mine to replace the existing mill in order to: 230925*5 2- - 0209266 1. comply with State.and Federal pollution control reauirements. The existing nill was releasing particulate emissions (dust) and asbestos (tremolite) fibers into the air in amounts in excess of State and Federal standards. In addition, waste material slimes from, the existing mill were polluting a nearby river. 2. reuuce the mill production costs which had risen at 10.1)5 per year iron 1?66 to 1971. 3- increase Zor.ciite's ore milling capacity by 3^)5. Under the Internal Revenue Cede, locally authorized government bodies may issue tax-exempt IDRB's for the purpose of industrial development and pollution control, t'ithin certain limitations, interest income from IDRB's is except from .`r.deral taxation in a manner similar to the treatment of municipal bonds. The interest erst of such borrowings is therefore lc-.-er than the cost of similar borrowings on a taxablp basis. In l'-_ case of the new Libby mill, ``ontana law authorizes Lincoln -Vnuty, .ibhi.t tucse ju.:' odiction the ..tins is located, to issue IDRB's to finance industrial development and pollution control. Acting within this authority, Lincoln County has passed a resolution to issue IDRB's for the .- . c:.....-in;: - tier. .-* ... ii...y mill. The Internal Revenue Service has ruled that t5,950,000 to be expended for the new mill meets the tax-exempt tests as follows: 1. Cl,SCO.000 per location limitation - An authorized government todv may raise funds in its name for any one industrial user within its jurisdiction up to $1.0 million for any purpose (up to $5.0 million under certain restrictive circumstances which 250925*6 -3- 0Z09266f cannot be complied with in the case of the new Libby mill). The $1.0 million per location rule allows Lincoln County to issue up to a lifetime maximum of $1.0 million of tax-exemnt IDRB's to finance development of the Libby operation. The Internal Revenue Service has ruled that Lincoln County may issue tax-exempt IDRB's totalling $1.0 million for the purpose of financing the $1.1 million Ore Stockpile and Blending Facilitv which is being constructed to insure uniform vermiculite feed to the new Libby mill. 2. $h,950.000 for pollution control - Tax-exempt status is unlimited for amounts expended on air and water pollution control facilities. In the case of the new Libby mill, the Internal Revenue Service has ruled that $^,950,000 of total expenditures on the new mill are for the purpose of pollution control. Consequently, this amour* satisfies the tax-exempt test. di-tv,t is o? idpb ?i:'a:ici:?g The firm of Blyth Eastman Dillon & Co. has agreed to underwrite the issue of $5,950,000 of IDRB's. The IDRB's would be marketed as one issue. Ho ;-. , for legal reasons the $5,950,000 woul. be composed of two issues, $^,950,000 of pollution control IDRB's for the new mill and $1,000,000 small issue (per location limitation) for the Ore Stockpile & Blending Facility. The IDRB's would be issued with a 25 year maturity. The repayment schedule would be interest only for the first 10 years and level debt repayment durir.m the remaining 15 years, resulting in an average life of approximately 19 years for the entire issue. On the basis of today's market conditions, for a Baa rated issue the IDRB's would carry a coupon rate of approximately 5 T/OT or about 2$ under the rate on a non tax-exempt issue of like maturity. The 250925*7 - i - 02092669 final pricing would be fixed at the time the IDRB's are marketed. The following schedule gives a breakdown of the anticipated costs to Grace for the 05,950,000 IDR3 issue: (See table on the next page) 25092548 -5- 02092670 Blyth Eastman Dillon Cost Estimate for IDRB Issues Totalling $5,n50,000 $1* ,950,000 Pollution Related Issue + $1.000.000 Email Issue Dated Date of Issues Due Date 5/1/73 5/1/81* _ 5/1/98 (1) (2) Coupon 5 7/85 p.a. (3) Average Life 19 yrs. 0 nos. 21 days Underwriters Fee $89,250 (M Effective Interest Cost per annum Interest & Underwriters Fee Only 5-95375 - All Estimated Costs Included 5-99!`05 (5) (1) IDRB's vill be marketed following 3oard action (2) Level Debt Sinking Fund (3) Based on current narks i conditions for Baa rated bonds (k) Cl5.CO per Cl,000 o'f IDRB's (5) Other Estimated costs applicable to issue Prir.t ir - $10,000 Bond Attorney lU.OOO Price Waterhouse Statement 15,000 Trustee (initial fee) 3,000 Miscellaneous 3.750 Total $1*5,750 25092549 -6- 020926: The firn of Chapman and Cutler (Chicago), vho are recognized Bond Counsel, have,on the strength of the Internal Revenue Service rulir.- received by R. Grace & Co., indicated agreement to issue opinions that ,950,000 being expended on the new mill for the purpose of pollution control and $1.0 nillion being spent for the Ore Stockpile fc Blending Facility are exempt from federal income taxes. The IDRB's would be issued in the name of Lincoln County. A W. R. Grace L Co. guarantee on the IDRB's vould be required. The new mill, the Ore Stockpile & Blending racility and the underlying land would be leased to Lincoln County by W. R. Grace f-. Go. and would serve as collateral for the IDRB's. The facilities and land vould be sublet back to R. Grace & Co. at exactly the same terms as reouired to service and retire the IDRB's. No additional administrative or other charges would be included in .the lease payments to Lincoln County except that the usual property taxes would be assessed. The lease arrangement between W. R. Grace *: Co. and Lincoln County would expire when the IDRB's have been retired. In the event of default, Lincoln County vould have the right to sublet the f~c `t.a.:i . -i to a third party until all cf the outstanding IDRP ` : beer, ictired. Lincoln County would assign its rights under the lease agrei'r.^nts to . The hank would act a? Trust ur.d ' .1J uiminirter the lease agrees---..a and would handle the servicing and amortization of the IDRB's. W. R. Grace & Co. would bear the cost of the Trustee. TAX EFFECTS OF IDRB'S TO '' R. GRACE & CO. 25092550 For tax purposes, W. R. Grace & Co. vould capitalize the cost of the new mill and the Ore Stockpile & Blending facility and depreciate them usire current depreciation schedules. Also, W. B. Grace & Co. would expense on r current basis that portion of the lease payments which corresponded to payments on the IDRB's as well as the payment of property taxes, the cost of th< Trustee and all other incidental expenses associated with W. R. Grace ,'c Co. ' -7- 02092672 financing arrangement vith Lincoln County. W. R. GRACE'S SET?ion LOAN AGREE* ZLT The issuance of IDRB's to finance a portion of the Libby project ould constitute secured debt in V. R. Grace & Co.'s accounts. On this :'.sis the $5,950,000 of IDRB's would be subject to Section 10(B)(5) of W. R. Grace St Co.s Senior Loan Agreement (the '\Vet" Agreement). The lenders under the "Met'' Agreement have recently agreed to increase the 10(B)(5} 1 imitation on secured debt for domestic and Canadian subsidiaries from 015 J million to $1*5.0 million. It was agreed with the lenders that the revised (15.0 million limitation could be applied up to a maximum of $25.0 million 'or general unspecified purposes or the full SU5.0 million for pollution related expenditures. Consequently, W. P.. Grace & Co. can accommodate the $5,950,000 of IDRB's for the Libby project under the "iTet1' Agreement (to be revised by F. Brennan). RZOUIP.rD BOARD ACTION The documentation for the $1* ,950,000 pollution control issue ar.d '.he 51,00', '10 small issue have been reviewed by the Corporate Legal Depart:..:.:.. The Board is asked to approve resolutions which essentially cover the following matters: (To be drafted by Gail Wood) 25092551