Capital One's warrants sold at a surprisingly low price last week as the market awaits Treasury Department sales of JPMorgan Chase & Co. and TCF Financial Corp. warrants.
If those auctions fetch similarly soft bids, it could strengthen the hand of other banks that will seek to repurchase their warrants from the government as more of them start repaying their federal aid.
"You're going to drive a harder bargain," said Espen Robak, the president of Plurus Valuation Advisors LLC.
The Treasury on Thursday auctioned off 12.7 million warrants in Capital One at $11.75 each for proceeds of $146.5 million. Though that was well over the initial asking price $7.50, it was under what some market watchers were expecting.
But a volatile trading day, the large volume of warrants flooding the market and the fact that this was the first auction of its kind in recent years may have driven down how much investors were willing to pay, market watchers said.
"These seem to be priced cheap," said Gary Townsend, the chief executive of Hill-Townsend Capital LLC. "It is possible that it was just market factors" that lowered bids.
Robak had estimated the Capital One warrants to be worth $15 to $20, and had expected them to fetch bids in the high end of that range.
There is no certainty that those other auctions will pan out like the Capital One auction, he said, noting that the first few banks that repaid their bailout funds earlier this year also got sharp discounts for their warrants before warrant prices swelled in later deals. Valuing warrants is also a highly complex process that hinges on current trading conditions, the long-term prospects of the company as well as subjective estimates of how volatile a stock will be over the next 10 years.
"Perhaps there is going to be a learning curve again," he said. "They learn how to manage the auction process better and they end up getting better deals."
Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette, said Capital One's warrants were sharply undervalued in comparison to the company's options on Thursday.
Capital One options with a call date of 2012 had an implied volatility of 43% on Thursday, according to Bloomberg News. Wilson's calculations show that the Treasury's Capital One warrants were priced at a volatility of 27%.
In general, longer-dated options are viewed as more valuable, and volatile. That was not the case in the Capital One auction.
"It seems like investors were demanding a discount. Or maybe they think that we're going to have a much less volatile future. I suspect not," Wilson said.
John Olagues, a former options trader that runs an options consulting firm, said the discount on Capital One's options could drive up premiums in coming auctions by drumming up interest and drawing more bids.
