“Fair Value” and “Fair Value to the Obligor”

The mortgage bond indenture (herein called a “Mortgage”) under which many electric and gas utility companies in the United States issue debt securities (herein generically called “bonds”) may be one of the most unloved instruments in all corporate finance. Many of them were written nearly one century ago, in formal, legalistic language (hardly “plain English”). Mortgages contain complex provisions relating to, among other things (1) the release of property from the lien of the Mortgage and (2) the use of property held by the company as a basis for the issuance of bonds, the release of other property from the lien of the Mortgage and the withdrawal of cash held by the trustee under the Mortgage (each of the uses of property listed in this clause (2) being called an “Authorized Purpose”). Of particular interest, and the subject of this note, are the requirements for certification of fair value in connection with these operations. These provisions reflect specific requirements of the Trust Indenture Act of 1939 (the “TIA”). Accordingly, this note will commence with a brief discussion of the TIA.

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