WALL STREET - Last month’s landmark initial public offering for Visa couldn’t have come at a better time for credit unions, many of whom received shares in the IPO.
The windfall meant million-dollar payouts for dozens of credit unions and helped others reverse a fourth-quarter expense related to the IPO–at a time when many of those credit unions are reporting higher loan losses.
“This should be a good financial month in credit union-land,” said Dallas Bergyl, president of Inova FCU, an Elkhart, Ind., credit union that received a $200,000 wire transfer from Visa last Monday as part of the IPO.
For bigger credit unions, such as North Carolina’s State Employees CU, the windfall was significantly larger. The $14-billion credit union received a $4.1-million payment from Visa and still has 108,301 shares left.
Like many others, SECU was also a beneficiary of the 2006 MasterCard IPO, receiving about $1.5 million in MasterCard shares.
Under the IPO each of the principal Visa card issuers, those with their own Bank Identification Numbers, received a pro rata share of the IPO based on their usage of the Visa network. All of the credit union bank issuers were issued non-public Class B shares eventually convertible to publicly traded Class A shares.
As part of the IPO, Visa immediately redeemed 39% of the Class B shares from it credit unions and banks at $42.77 each and wired the funds to the recipients last week. Additional shares apportioned to the credit unions and banks are being held in escrow by Visa.
Funds from the IPO and the remaining shares owned by the credit unions and banks are being held by Visa to fund a multi-billion dollar reserve to pay for legal settlements on a multitude of suits. About $3 billion of it will be used to settle an antitrust suit brought by Visa competitors American Express and Discover Financial.
Credit union and bank stockholders will continue to be liable for future legal settlements. That is why Visa is holding the shares. But nobody knows what the future liability will be and how long the credit unions and banks will be liable.
None of the credit unions has been told by Visa when they will be issued the remaining shares, according to Scott Waite, chief financial officer for Patelco CU who has been advising credit unions how to account for the Visa windfall. “I don’t think anybody knows, and Visa won’t tell anyone,” said Waite, whose credit union received a $2.5-million payment for the Class B shares last week.
Visa representatives would not respond to requests to comment.
Last week’s windfall not only enriched cash coffers but also allowed credit unions to reverse their fourth quarter accounting for the IPO, said Waite, an adviser to the Financial Accounting Standards Board. Under FASB rules, credit unions were required to expense the amount of money projected to go towards Visa litigation cost. Patelco CU recorded $1.5 million in expenses related to the IPO for the fourth quarter, according to Waite.
The hit to earnings by the accounting came in the final days of 2007, as credit unions were closing their books on the year. “Within days of the end of the fourth quarter credit unions found out they were on the hook for that expense,” said Waite.
Observers expect the Visa stock to as lucrative as the MasterCard issue, which has been one of the hottest stocks on the market and increased more than five-fold since its introduction, from $39 a share to more than $230 last week.
Visa, because it is the dominant payments network–it is 50% larger than MasterCard–is expected to be a high performer, in the long-term.
Under the terms of the Visa IPO, credit unions must hold their shares for three years. But MasterCard also had that condition and eventually offered to redeem the shares after a year. Both NCUA and state regulators, who generally bar credit unions from buying stocks, have agreed to allow them to hold their Visa and MasterCard stock because of the extraordinary way it was acquired. Credit unions may sell their shares, but not buy more on the open market.
After completion of the IPO, Visa will be controlled by four major banks who use the network the most, with JP Morgan Chase, Bank of America, Citibank and Wells Fargo. The group will own more than 25% of the shares.
Three of those banks, JP Morgan, Citibank and BofA, as well as HSBC, also hold a controlling ownership in MasterCard after the IPO.
The Visa IPO was the largest, by proceeds, ever in the U.S., raising more than $19 billion. The offering came at a particularly good time for some of the big banks that are struggling from the mortgage crisis. National City Corp., which is seeking a merger, got a $2.3-million payment from Visa. But the biggest winners are JP Morgan Chase and BofA, who were among the eight major underwriters for the IPO, not only get payments for the Class B shares, but also split up an additional 40.6 million shares at the initial price of $44. Those extra shares were worth almost $1 billion more last week, just three weeks later.
