Capitol Bancorp (CBCRQ) in Lansing, Mich., may have found its first lifeline after years of searching.

The embattled $1.9 billion-asset company announced earlier this week that it had entered into agreements with two units of ValStone Partners, a private-equity firm in Birmingham, Mich. The ValStone units have agreed to buy $35 million in common stock and $15 million in preferred stock. They will also buy $207 million of Capitol’s nonperforming loans.

Capitol filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Eastern District of Michigan in August. Both agreements with ValStone are contingent on Capitol's emergence from bankruptcy.  

As part of the bankruptcy plan, Capitol is seeking partners to invest $70 million to $115 million in exchange for 47% control of the company. Capitol would convert the interests of all existing stakeholders into a 53% equity stake. Existing stakeholders include those who own common stock or Capitol’s $158.3 million of debt.

The ValStone "transaction represents a significant step toward the completion of our plan of reorganization," Joseph D. Reid, Capitol’s chairman and chief executive, said in a press release.

The loan sale will unload about 80% of Capitol's nonperforming assets. A call to ValStone was not returned, but the firm’s website lists nonperforming loans as one of its typical transaction targets.

Capitol has been searching for new equity since at least 2009, when it hired KBW's Keefe, Bruyette & Woods to help it plot its survival. Capitol also sold dozens of its banks across the country, reinvesting the proceeds to keep the capital ratios at its struggling bank from dipping below 2% — a threshold where regulators could have become compelled to fail them.

The bank sales were incrementally helpful, but the strategy has reached a tipping point as Capitol’s remaining banks are largely the most troubled ones. Several of the company’s remaining banks are dangerously close to the 2% capital ratio.

Capitol's bankruptcy plan has a confirmation hearing on Oct. 16.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.