Anchor BanCorp Wisconsin has been tossed a private-equity life ring, but the company must persuade one of its lenders and the Treasury Department to help reel it in.

The newly formed Badger Capital LLC has agreed to inject up to $400 million of capital into the ailing $4.6 billion-asset Anchor, in exchange for a majority stake. Badger is run by Steven Hovde, a prominent investment banker who has advised banks and thrifts for decades.

Anchor owes U.S. Bancorp $116 million on a line of credit that comes due in May. Badger's capital infusion is contingent on Anchor's resolving that debt and on the Treasury's converting its preferred shares in the Madison company to common ones. The department invested $110 million in Anchor through the Troubled Asset Relief Program in January.

If all goes well, Anchor, which some analysts have said was in danger of failing, would not only avoid this fate but also be in a position to resume growing. "Almost overnight we will go from a company that is shrinking to retain capital to a company that will have to rapidly deploy this new capital," said Chris Bauer, who joined Anchor as president and chief executive in June.

Anchor was in a negative equity position on Sept. 30, and its thrift has until the end of this month to significantly boost its capital under a regulatory order.

"This is a company that we knew was in a precarious position in terms of capital and credit," said Christopher McGratty, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "If they didn't get equity soon, the only logical outcome for them was to become part of a larger institution through an FDIC-assisted transaction."

Despite Anchor's woes, Hovde at Badger Capital said the banking company has much to offer as an investment. "This is a 90-year-old bank with a lot of name recognition. It is one of the preeminent banks in Wisconsin," Hovde said. "It is suffering from real estate problems, but there is a very good core business there."

Jeff Davis, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets Corp., said that likely U.S. Bancorp would settle for less than it is owed and the Treasury would agree to a conversion. Without Badger's investment, he said, the prospect of any repayment is grim. "Treasury is going to have to play ball here if they want any prospect of getting repaid," Davis said. "Same goes for U.S. Bank. Without this deal, both are staring at buckshot."

Neither U.S. Bancorp nor the Treasury returned calls seeking comment.

The department's official vehicle for converting preferred shares under Tarp into common equity is the Capital Assistance Program, which was introduced in February. The program never took off; only a few companies said they would even seek conversions. Nov. 9 was the deadline to apply.

Bauer said that Anchor did not apply for CAP but that the Treasury already has leeway under Tarp to convert the shares.

"We will now present our case to Treasury as to why we think we should be granted this conversion," Bauer said. "I think it makes an awful lot of sense for them because, once this transaction takes place, it will be stock in a highly liquid, publicly traded company that is extremely well capitalized and will present them with multiple options to liquidate."

Hovde was similarly optimistic.

"All the stakeholders are going to have to participate," he said. "It is in everybody's best interest to position Anchor to not only survive but thrive."

Should Anchor meet all the contingencies, Badger would buy roughly 483 million shares for 60 cents each, or $290 million. An additional $110 million would be delivered through a loan that would be convertible to common equity, also at 60 cents a share. The company would also launch a $100 million common stock offering to existing shareholders. Along with the Tarp conversion, that would net the company more than $600 million in common equity, taking its tangible common equity ratio from minus-0.7% at Sept. 30 to more than 10%, McGratty said.

After all the transactions are completed, existing shareholders would own less than 5% of the company.

The AnchorBank unit was required under a June 26 cease-and-desist order from the Office of Thrift Supervision to have a leverage ratio of 7% and a total risk-based capital ratio of 11% by Sept. 30. The thrift missed the targets, with ratios of 4.28% and 7.59%, respectively. The same order called for the leverage ratio to be 8% and the total risk-based capital ratio to be 12% by Dec. 31.

Bauer said the company's leverage ratio would be more than 10% and its total risk-based capital ratio would be more than 16% once the transactions closed.

McGratty said he expects Anchor's losses to accelerate this quarter and next as the company sheds problem assets. "That would allow for a cleaner, fresher slate when the transaction closes," he said. In a research note he forecast that the company's tangible common equity ratio would sink as low as minus-3.4% by the time the deal is set to close.

McGratty and Davis said Badger would probably use Anchor as a vehicle to buy failed banks. Bauer and Hovde said it will look to both organic growth and possible acquisitions. "We believe that we will be in a great position to take market share," Bauer said.

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