AmericanWest Bancorp. in Spokane, Wash., has spent the past two years looking for a remedy to its severe capital deficiency.
With one likely option left, it is now up to the federal bankruptcy court to determine the company's future.
The $1.5 billion-asset AmericanWest last week announced the sale of its banking subsidiary to a heavily capitalized investor group, SKBHC Holdings LLC, in a bankruptcy court bidding procedure. The company filed for Chapter 11 protection the next day in the hope that the court would approve the sale of its AmericanWest Bank for $6.5 million in cash to SKBHC.
The plan is then for SKBHC, backed with $750 million in commitments from private-equity groups, pension plans and mutual funds, to inject up to $200 million into AmericanWest Bank, bringing its ratios into good standing with regulators.
The parties have captivated investors, analysts and attorneys with this unusual gambit.
"It's been an intensive and exhaustive effort where no stone was left unturned," AmericanWest's president and chief executive, Pat Rusnak, said in a phone interview last week.
Attorneys say it is extremely rare for financial institutions to seek to close a deal using the bankruptcy courts. Yet some analysts view this as an innovative strategy.
"When a bank is backed up against the wall, there is not much they can do," said Rick Levenson, the president of Western Financial Corp., an investment banking firm in San Diego. "Overall, it is healthy for the industry that this level of activity is occurring and that the capital on the sidelines is coming back into the marketplace."
Attorneys and analysts say it is also unusual for a bank holding company to file for bankruptcy protection before a bank has become insolvent.
"It is a rare occurrence for a variety of reasons," said Frank Bonaventure, a principal at Ober, Kaler, Grimes & Shriver. "Most [bank holding companies] want to avoid it, because they are trying to save the company for their shareholders' value."
AmericanWest, however, decided to make this a last-ditch effort in its quest to recapitalize the bank.Since mid-2008, the company has sought capital from more than 100 prospects and through various approaches, including a trust preferred offering and a common stock offering.
The bank has been operating under a cease-and-desist since May 2009. In February the Federal Deposit Insurance Corp. turned up the heat, issuing a prompt corrective action directive.
"This was the only viable alternative for a recapitalization," Rusnak said of the bankruptcy filing. "Just because it hasn't been done before" through bankruptcy, "doesn't mean it couldn't be done."
The parent company decided on this approach because it was tapped out of equity — it had negative stockholders' equity of $1.8 million as of Sept. 30 — yet was loaded with trust-preferred securities. Filing for bankruptcy protection would give the company some relief from its $41 million in outstanding Trups obligations.
If the court approves the plan, it would take control of the bank's assets, auction them off and thus close a deal that may have otherwise been impossible for AmericanWest to complete without potentially huge legal battles.
"The bankruptcy court has the ability to wipe out the bank holding company's contractual commitments, which would be breached by a change of control in the bank subsidiary" and which would concern the purchaser, said Gardner Davis, a bankruptcy attorney and partner at Foley & Lardner LLP's office in Jacksonville, Fla.
The bankruptcy court for the Eastern District of Washington state has neither approved the plan nor set a date to approve the bid. Rusnak said he hopes the deal will close in December.
Bank holding companies with trust-preferred securities are finding it increasingly difficult to get Trups holders on board with recapitalization plans.
Late last year, CIB Marine Bancshares Inc. in Pewaukee, Wis., filed for Chapter 11 bankruptcy protection in order to swap its trust-preferred securities for preferred stock after defaulting on its debt obligations. The idea was to allow the $657 million-asset company to recapitalize its bank after its Trups holders rejected a similar plan outside of bankruptcy court earlier in the year.
In the case of AmericanWest, a Chapter 11 filing also protects the company from any litigation from Trups holders after it sells the bank at a discount. Rusnak said the company plans to use the $6.5 million in cash from SKBHC, which is based in Corona del Mar, Calif., to pay the bankruptcy costs. The remainder of the cash would go to its Trups holders, amounting to an approximate 15% payout.
"Absent the bankruptcy court approval, the board of the bank holding company is likely to get sued for failing to discharge its fiduciary duties with the sale of the bank," Davis said.
Such suits are becoming more common in the current environment in which banks are selling at a discount.
Most recently, a handful of law firms announced their intent to sue on behalf of shareholders of First Franklin Corp. in Cincinnati. They accuse the company's board of breaching its fiduciary duties in a deal announced Oct. 13 in which the company would be acquired by its neighbor, Cheviot Financial Corp., for $24.4 million.
Going through bankruptcy to close the deal also will take less time than trying to complete a recapitalization outside the courts. Gardner said the bankruptcy auction process typically takes less than six weeks.
While Gardner said he has not heard of a bankruptcy case like AmericanWest's, "in this situation, it makes a lot of sense and we may see more of it."
Still, attorneys said this process creates some potential risks. For one, it is a proposed bid, which means another qualified group could outbid SKBHC at the last minute, triggering a court auction. Also, the deal must be approved by regulators in addition to receiving court approval.
SKBHC itself is something of a rarity. The holding company is heavily backed by big-name funds and is headed by Scott Kisting, the former co-head of the global banking group at Merrill Lynch Corp. SKBHC received approval from the Federal Reserve for its bank holding company the day before it announced the agreement with AmericanWest.
This would be SKBHC's second bank acquisition. It received approval to acquire Starbuck Bancshares Inc. in Starbuck, Minn., on Oct. 26, and will use that bank charter to acquire AmericanWest Bank.
SKBHC has up to two years to deploy its $750 million in capital commitments. AmericanWest Bank, with 60 branches throughout Washington, Idaho and Utah, would give it a platform from which to make other deals in its target markets.
The deals will hardly put a dent in the capital SKBHC has left to deploy. SKBHC's Kisting declined to comment for this story.
Levenson said with that store of capital, SKBHC could grow into a $7.5 billion-asset bank in the next few years. "They have the ability to be at the higher level" in acquiring larger banks among equity-backed groups, he said.