South Financial Group Inc. is about to find out just how much of the market's confidence the banking industry has regained.
The struggling $13.3 billion-asset Greenville, S.C., company announced a plan Thursday to add $300 million to $315 million to its Tier 1 capital. Among other steps, it would raise $75 million through a public equity offering.
"It will be a test of the capital markets' and banking investors' appetites for riskier investments," said Jeff Davis, the director of research at Howe Barnes Hoefer & Arnett Inc. "If they can do it, it provides hope for other institutions that are struggling with mountains of nonperforming assets."
South Financial lost almost $550 million last year and $90 million in the first quarter. Credit issues in places outside its core market of Greenville — largely Florida real estate loans — have been the root of the problem.
In recent years South Financial was an active acquirer of community banks that were heavily concentrated in residential construction and land development in Florida. Those markets have taken some of the hardest hits in the country, and the nonperforming loans in the company's portfolio are escalating quickly.
South Financial said the capital boost would put it in a position to absorb losses in the worst-case scenario under the stress tests the federal government applied to the country's 19 largest banking companies.
"We know what our balance sheet looks like, and we are comfortable with that, but what we don't know is what the economy is going to do," said James Gordon, South Financial's chief financial officer. "We don't know if it is going to get worse or better."
Investors, though still guarded, have been warming to the sector lately. Financial services companies raised nearly $50 billion in stock offerings last month to boost capital, or more than one and a half times the amount they had raised in the first four months of this year.
Adam Barkstrom, a managing director in equity research for Sterne, Agee & Leach Inc., said South Financial had its work cut out for it, but he sounded optimistic that the offering would get a warm reception.
"Do people want to buy it? At these price levels, heck yeah, I would," Barkstrom said. "But they still have to get shareholder approval. They have a number of things to get done."
Gordon said his company is confident that it will find buyers.
"We believe we will be successful, and that is why we launched it," he said.
The margin of safety provided by the added capital would bring a hefty price for South Financial's current shareholders. If the new shares were sold at a substantial discount to raise the $75 million, the current investors would be heavily diluted. South Financial's stock had already fallen almost 65% this year, closing at $1.60 a share Wednesday, because investors feared such dilution and more problems surfacing in the loan portfolios, analysts said. On Thursday the stock dropped another 24 cents, to $1.36 a share. The price of the offering was expected to be set after press time Thursday.
The plan also calls for South Financial to convert $94.5 million of mandatory convertible preferred stock held by two investors to common shares and offer to exchange the remaining $95.5 million of such preferred stock. It also expects to generate up to $50 million by converting hybrid securities and selling ancillary businesses.
Davis said that if the plan worked, the company would be left with $250 million of cash to weather souring loan quality, which has spread this year to the South Carolina coast. "That is a sizable pot of cash to support the bank," he said. "The company should have a fair bit of staying power. That doesn't mean they can't not make it, though."