Capitol Bancorp Seeks Restructuring to Avoid Bankruptcy

Capitol Bancorp in Lansing, Mich., is asking its debt holders to convert their interests to equity in what appears to be a last-ditch bid to avoid bankruptcy.

The struggling $2.1 billion-asset company on Friday commenced an offering in which it is asking the holders of $158.3 million of debt to exchange their securities for preferred or common stock. It plans to run the offering through the end of July.

Over the last few years, several struggling companies have tried to convert trust-preferred securities and other types of debt into common equity in an effort to make themselves more attractive to outside investors. Such exchanges, however, are difficult and are often met with tepid results. In early 2011, Capitol tried a similar exchange, but it only was able to sway holders of $19.2 million of debt out of $170.8 million to convert.

The company has been fighting for survival since 2009, when it began sell many of its banks to cut costs and raise much-needed capital. The proceeds from each sale have kept the struggling banks afloat, though the holding company's capital has been all but eroded.

"We are optimistic that the restructuring plan will provide benefits to Capitol, its creditors and shareholders, through the resolution of our trust preferred securities and Capitol's senior debt, which will facilitate new equity investments in the corporation," said Joseph D. Reid, chairman and chief executive, in a press release Friday.

Despite Reid's optimism, Capitol is preparing a pre-packaged Chapter 11 bankruptcy reorganization. The company is soliciting votes from all debt and equity holders for the bankruptcy if the exchange is unsuccessful. The bankruptcy reorganization would convert all existing stakeholders into a new class of common stock that would retain 53% of the company. The company would sell the other 47% to an investor who could recapitalize the company.

"A number of the company's subsidiary banks are dangerously close to failing to meet the minimum capital ratios necessary to avoid seizure of the banks by the Federal Deposit Insurance Corporation," the company said in the solicitation for the bankruptcy vote filed. "Such a bank seizure and liability assessment would virtually destroy any value held by Capitol's current stakeholders."

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