N. Peter Knoll, Esq.
Graham & James LLP
885 Third Avenue
24th Floor
New York, New York 10022-4834

Dear Mr. Knoll,

This responds to your letter of July 23, 1997, asking whether a bank loan meets the definition of "purpose credit" in section 221.2 of Regulation U.

We understand the facts to be as follows. A bank is proposing to lend money to a corporate borrower to purchase all the shares of a target corporation. The target corporation's stock is not "margin stock" as defined in Regulation U. However, the target corporation's principal asset is approximately 57 percent of the shares of a company whose stock is margin stock. The collateral for the loan will be the margin stock owned by the target corporation, which is worth approximately $4.3 million. The target corporation has agreed to be merged into the borrower.

The bank would be making a loan secured by margin stock and therefore would have to obtain a Form FR U-1 from its customer. If the loan constitutes "purpose credit," the bank may not lend more than 50 percent of the margin stock's current market value (in this case, $2.15 million). "Purpose credit" is defined in Regulation U to mean "credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock."

Board staff is of the view that the "ultimate" purpose of the loan is to acquire the margin stock owned by the target corporation. The loan is therefore a purpose credit within the meaning of Regulation U.

This is a staff opinion only, as the matter has not been presented to the Board and is limited to the facts presented. Different facts could result in a different conclusion.

Yours truly,

(signed) Oliver Ireland

Oliver Ireland