Add Capitol Bancorp Ltd. to the list of companies whose recapitalization efforts have been complicated by debtholders who are unwilling to budge.
The $4.7 billion-asset company on Tuesday terminated an exchange offer to some of its trust-preferred holders because it had failed to secure the consent of more senior debtholders. Had it been successful, Capitol, which has dual headquarters in Lansing, Mich., and Phoenix, could have converted as much as $14 million of trust-preferred securities to common equity.
The goal had been to boost its dangerously thin tangible common equity ratio of 0.37%. With just $88.3 million of shareholder's equity left, the embattled company can use any increase in common equity that it can get.
The exchange also might have made it easier for additional equity to flow to Capitol as it would have eliminated Capitol's most expensive tranche, which carried a 10.5% coupon.
Although a few companies have persuaded debtholders with the argument that capital-raising efforts relied on them, such investors largely have been unmoved.
"These sorts of deals have become very hard to pull off," said Christopher J. Zinski, a partner at Schiff Hardin LLP in Chicago. "The trust-preferred bondholders essentially have blocking rights to restructurings and recapitalizations."
One reason for the difficulty is that a method of cashing out is often not clearly defined for the trustee. Also, several hedge funds that own these bonds have said they have no interest in exchanging their holdings at a discount.
For Capitol, it appears to have 12 different issuances of trups, which collectively make up $170 million of capital for the company.
Capitol was seeking to convert to common equity the holders of its 12th issuance yet first needed permission from the holders of its first issuance to do so. Capitol required the consent of at least 30% of the holders; it received about 22%.
Even if Capitol had received permission from the senior debtholders, only 30% of its 12th group of bondholders had agreed to exchange their shares.
"There wasn't really much interest to convert the debt. That has been an issue for a number of struggling companies," said Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett Inc. "It doesn't speak well for the company, though."
For instance, BankAtlantic Bancorp Inc. in Fort Lauderdale, Fla., in August similarly called off an attempt to cash out its bondholders after eight months of trying to gain their consent. The company initially offered 20 cents on the dollar, but eventually increased that offer to 60 cents.
Calls to Capitol were not returned Wednesday. Yet it said in a press release in August that the conversion would have helped bolster its capital ratios, which have dipped in the past two years as it has sustained significant loan losses.
"This pending exchange offer provides an opportunity to strengthen Tier 1 common and tangible common equity ratios, while also reducing interest expense associated with the debt securities," Joseph D. Reid, Capitol's chairman and chief executive, said in the August press release.
Several of the company's banks are undercapitalized, including its flagship Michigan Commerce Bank, which had a total risk-based capital ratio of 3.94% at the end of the second quarter, making it significantly undercapitalized.
Over the past year and a half, Capitol has sustained itself by selling off bank units and consolidating others in an attempt to harvest capital.
Yet those moves have proven to be incremental compared with the losses it has recorded. Capitol has lost $330 million since the third quarter of 2008.
And with Capitol's tangible common equity ratio moving closer to insolvency, the urgency is increasing.
"They really can't continue to lose $40 million a quarter like they've been losing," said Eliot Stark, managing director of Capital Insight Partners, a Chicago investment banking firm. "They can't afford it."
Although more troubled banks are finding investors these days, experts said Capitol's chances of attracting a white knight are more difficult because of its unique structure.
The company, which once had set its sights on having 100 charters, spent the past decade pairing up with local investors across the country to establish small single-office commercial banks. To would-be investors, that structure is a tough sell because any investment would involve an arduous due diligence process.
Also, Capitol lacks franchise value because its banks are uniquely branded.
"They are not a significant player in many of their markets and they are far-flung" Stark said. "It is a difficult beast to get your arms around."