Fleet/Norstar, Pressed by Federal Reserve, Seeks to Sell 10% Stake in Capital Guaranty
Capital Guaranty Insurance Co. Friday announced it was seeking an institutional investor to purchase a 10% stake in the municipal bond insurer for as much as $17.5 million.
The ownership stake is being sold by Fleet/Norstar Financial Group at the behest of the Federal Reserve Board, which has said the banking company must either reduce its holdings or consolidate Capital Guaranty's liabilities onto its balance sheet.
Michael Djordjevich, president and chief executive officer of Capital Guaranty, said the company interviewed five investment banks before settling on Merrill Lynch & Co. as the best firm to help in the search for an investor. Considerable interest already has been expressed, Mr. Djordjevich said, including inquiries from large European concerns.
"I would not be surprised if a European company came right off the top," he said. "The likelihood of that is petty high because there's a lot of interest in American financial companies right now."
Before settling on Merrill Lynch, the various financial advisers applying for the job estimated that the 10% stake would fetch prices of 1.1 to 1.4 times book value, computed according to generally accepted accounting principles.
Based on shareholders' equity of $125 million as of Aug. 31, the 10% stake would cost anywhere from $13.75 million to $17.5 million.
The ideal institution would be a large firm with a long-term outlook, according to Mr. Djordjevich. "A major objective is to have a strategic investor with a long-term outlook, a compatible philosophy, and we would like it to be at least a double-A institution," he said.
At this stage in Capital Guaranty's evolution, Mr. Djordjevich is ruling out a public stock offering. The returns to the current shareholders would not be maximized because all of the firm's capital is not employed, so returns are less than optimum for public consumption, he said.
Where now a common stockholder might be mulling a 12% return, in two years --after the company employs that underleveraged capital -- returns will be in the 17% to 20% range, Mr. Djordjevich said. The lower returns are the downside to financial strength; Capital Guaranty is considered the strongest risk in the market with a 90-to-1 risk to capital ratio.
The regulatory requirements nudging Fleet/Norstar to sell part of its holdings echo the situation Citibank was in before selling a majority stake in AMBAC Indemnity Corp. to the public in July. In both cases, a bank was looking at a balance-sheet consolidation that would have made compliance with the Bank of International Settlements' guidelines on risk-based capital reserves impossible to meet.
Mr. Djordjevich, however, was quick to point out the differences between the two scenarios. "Fleet/Norstar does not have a controlling interest," he said. "The Fed attitude toward Fleet/Norstar was much much more benign. The Fleet/Norstar [officers] are only observers on our board of directors. They don't even vote.
"They want to sell it and the Fed expects them to do it," he added. "But this is not a comparable situation at all."
Fleet Norstar now holds a 35.16% share of Capital Guaranty's ownership, so the sale will bring it down to 10%.