If there is any trend in raising capital these days, it could be simply that so many banking companies are doing it - or hoping to.
Why they need more capital is simple. Healthy companies want to repay the federal government or buy failed banks. Regulators are also pressuring many banks, not just troubled ones, to fatten their capital cushions.
How they are going about it varies widely. Those that can sell common stock generally are, though sometimes at a steep discount to their trading price. Struggling companies have had to get more creative, with debt-for-equity exchanges becoming an increasingly popular option.
Still, many banks cannot find capital at all. Far less private equity is chasing deals than the hype suggests, industry observers say. And traditional capital-raising tools, like bank-holding-company loans and trust-preferred securities, are no longer an option in most cases.
No quick fixes are likely, even as the economy improves, says Max Neukirchen, a partner in the corporate and investment banking practice at the consulting firm McKinsey & Co. He expects the capital scramble to take years to play out. "Capital is scarce and will remain scarce," he says.
Kenneth Kohler, a partner at the law firm Morrison & Foerster LLP, agrees, saying community banks are having more of a challenge attracting investors than large ones, and private banks are getting less interest than publicly traded ones.
"People are resorting to a whole variety of techniques to raise capital, and even so, a lot of banks, particularly smaller ones, can't do it," he says.
First Financial Bancorp., Flagstar Bancorp Inc. and Midwest Banc Holdings Inc. all took steps to bolster their capital in January, each in their own way and for different reasons.
The thriving $6.9 billion-asset First Financial talked of buying more failed banks and repaying funds it received from the Troubled Asset Relief Program, as it sold common stock for the second time in less than a year. The Cincinnati company ended up raising $96.5 million.
A public offering was not an option for the beleaguered Flagstar of Troy, Mich., which lost nearly $500 million last year. It secured a $300 million infusion from private-equity investor MatlinPatterson Global Advisors, to go along with a rights offering. MatlinPatterson also put $350 million into the company last year.
And Midwest of Melrose Park, Ill., persuaded its preferred stockholders to convert to common shares, in a critical step of its continuing battle for recapitalization.
Observers say companies perceived as potential winners in the lotto for failed banks will be the most successful in finding fresh capital. Others could find raising capital tougher, regardless of their health.
At least half a dozen community banking companies that had sufficient capital, but sought more to fund growth, pulled public offerings late last year, citing poor market conditions. A few others settled for less than they set out to raise.
Several observers blamed timing, saying investor interest would surge along with new stock offerings after the release of fourth-quarter results.
Mark Fitzgibbon, the head of research at Sandler O'Neill & Partners LP, says share prices at a few companies traded up after they issued stock in January - a good sign for the market. "That normally doesn't happen," he says.
But others say smaller companies could be in for a market chill. In times of volatility, investors tend to go up the market-cap spectrum," says Laurie Hunsicker, an analyst at Stifel, Nicolaus & Co.
She expects investors to focus on companies with excess capital and pristine credit this year, dimming prospects for those with elevated nonperforming loans.
Hunsicker recommends that potential issuers discouraged by the pricing of an offering go through with it anyway. "On the buy side, there probably is only so much appetite for yet another turnaround story," she says. "The small companies that are in need of capital and that are frustrated about the discount should continue going forward, because I think there will come a time when the small companies - and I'm talking about the ones with credit issues - will be unable to access the capital markets."
Michael Iannaccone, the president of MDI Investments Inc., agrees. The expectation is that banks have another challenging year ahead, "so if the recovery is going to come in 2011, why invest now?" he says. "The bank might not be able to survive 2010."
Some wealthy investors have stepped in to lend money to select capital-strapped banks, though. Iannaccone knows of one $200 million-asset bank that found no buyers for a $4 million convertible debt offering at 9 percent, so the bank decided to consider a single investor willing to do the deal for 11 percent.
He says regulators also are quietly coaxing healthy banks to raise capital, even though many are reluctant to do dilutive offerings. He says the hope is they will begin to pick off more strugglers and absorb failures. "When banks are examined, they're saying to those with high ratings, 'Can you help us out here? But you need to raise capital,'" he says. "I know that's what they're doing."
Even among the relatively healthy, community banks often have concentrations of commercial real estate loans that scare off investors, Kohler says.
But in cases where capital raises look unlikely or just unattractive, other plans are generally afoot. Few view it as an option to let their capital stand as is, amid such regulatory uncertainty.
Some are shrinking to boost their capital ratios. "The only show in town right now really is through shrinking the balance sheet or issuing common stock," says Peyton Green, an analyst at Sterne Agee & Leach Inc.
"I think clearly companies are trying to prepare for a more difficult regulatory environment where higher capital standards could come about."
Kohler says offers to exchange debt for equity also are "on the radar" a lot more since some have succeeded. "Debt is trading at such low levels, reflecting the concern of investors' not getting paid, so they're open to discussion," he says. "Depending on the terms of the exchange, that might be a risk they are willing to take. But generally it only works when banks are highly distressed."
Debt securities have no upside, so if the risk is not getting paid at all, investors are more willing to cash in for what amounts to a "lotto ticket" in the form of equity, Kohler says.
Just about everyone concedes that private equity is less of a force than expected.
"A lot of people thought private equity would come in and see bargains," Kohler says. "That has not happened to any great extent."
Most cite regulatory hurdles as the primary reason.
Iannaccone says many from outside the banking industry realized that finding a suitable investment, getting regulatory approval and reaching profitability would be too involved. "There is a considerable amount that has left the market," he says.
He also has seen some deals fall apart when the time comes to sign the letters of intent, after it becomes clear that the same investor had been negotiating with several different banks and only intended to put money into one.
"That is not an isolated incident," he says. "The amount of money actually out there is 10 percent of what you hear."