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National Penn Bancshares Inc. in Boyertown, Pa., said Thursday that net income fell 36% in the fourth quarter from a year earlier but asset quality trends continued to improve.
January 27 -
Capitol Bancorp Ltd., which has headquarters in Lansing, Mich., and Phoenix, has commenced an exchange offer to holders of its trust-preferred securities.
January 5 -
Add Capitol Bancorp Ltd. to the list of companies whose recapitalization efforts have been complicated by debtholders who are unwilling to budge.
October 20
Add another bullet point to the list of ways that trust-preferred securities are making life difficult for community banks — a stumbling block to deals.
The same securities once used to boost capital at most bank holding companies have moved to the forefront of prospective buyers' questions in acquisitions or capital raises, bank attorneys said.
"Trups are the bane of my existence," said Ann Lawrence, a partner at the DLA Piper law office in Los Angeles. "It's the negotiating item of any first conference call we have. … It's the difference between a deal getting done and not getting done."
Buyers face the daunting task of reaching most of a target's trust-preferred holders to get any change in control or restructuring approved, and some have failed to do so. So if buyers can avoid a deal involving a bank holding company with outstanding trust preferred, they will.
The problem with an avoidance strategy is that too many community banking companies issued trust-preferreds. Some of these banks are heavily dependent on them as a source of capital, but suitors see them as debt.
More than 62%, or 607 bank holding companies under $20 billion of assets, have $20.3 billion of trust-preferreds outstanding at Sept. 30, according to data compiled by Foresight Analytics, a division of Trepp LLC. Among that group, 87% of them have trust-preferreds that compose 10% or more of their Tier 1 capital.
"It is truly an issue in any M&A context today," said Frank Bonaventure, a lawyer at Ober, Kaler, Grimes & Shiver. "Acquirers, in my opinion, would much rather look at a target that doesn't have Trups," largely because of the difficulty in contacting the holders for approval.
Bankers in the position to buy agreed, adding that it has become one among several concerns when vetting targets.
Trups are "one of the suspect assets" when looking at a deal, said John Kanas, chairman, president and chief executive of the newly public BankUnited Inc. in Miami Lakes, Fla.
Trustmark Corp.'s CEO, Jerry Host, said his company scrutinized trust-preferred holdings in the due diligence of targets, though they have not yet been a deal breaker for the Jackson, Miss., company.
On the other end of the spectrum, dozens of bank companies are trying to reduce their trust-preferreds outstanding, mostly in soliciting to the holders to convert the debt to equity at a discount to boost capital levels.
First Banks Inc. in St. Louis said Jan. 21 that it was extending its exchange offer to its trust-preferred holders for the second time until Feb. 4, months beyond the original deadline of Nov. 19. The $7.9 billion-asset company began soliciting its holders in October, and most recently received approval from holders of about 48% of its trust-preferreds outstanding. Its needs a majority.
"We are pleased that many holders continue to turn their attention to the proposed amendments, which we believe provide an important opportunity to improve the capital position of the company," First Banks President and CEO Terrance McCarthy said in a recent press release. "In order to ensure that all holders have adequate time to carefully consider the proposed amendments and to provide a response, we believe that a second extension to the solicitation period is warranted."
Though a few companies have been successful at exchanges in the past year, many have not.
Capitol Bancorp Ltd., which has been on a bank-selling spree since 2009, started soliciting its trust-preferred holders in early January to convert debt to equity, according to a recent Securities and Exchange Commission filing. The company, with dual headquarters in Lansing, Mich., and Phoenix, offered common stock to holders of its $170.8 million of trust preferred as part of discounted exchange.
The offer closed Monday, but results have not yet been publicly disclosed. The $4.2 billion-asset company previously attempted an exchange offer with some of its trust-preferred holders but terminated it in October after Capitol could not reach the necessary threshold of 30% approval its more senior-debt holders.
Capitol was the single issuer in its offerings, but pooled trust-preferred securities are often tougher to resolve because of their complex structure.
"The way the securities are packaged makes it nearly impossible to go out and reach investors," Lawrence said. "Trups have turned out to be so detrimental to the health of [the banking] industry."
Such difficulties may have exacerbated the epidemic of failures in the past two years.
The parent company of the first bank to fail this year, First Commercial Bank of Florida in Orlando, had first attempted to get its trust-preferred holders to agree to raise equity.
But the bank's attorney, Jack Greeley at Smith Mackinnon, said the company could not get sufficient consent from its trust-preferred holders to accept at a discount. The $598.5 million-asset bank failed Jan. 7.
"It's like making me buy a washer when I can get it at Sears for $200 and you want $500 for that thing? I am not going to do that," he said. Some "holders think 'I'm going to get 100% or zero, so don't talk to me about anything in the middle.' "
Whether the trust-preferred holders of FCB Florida Bancorp. Inc. could have saved the bank from failure is questionable since it still held problem assets in one of the most economically troubled states.
"But if it had been resolved, it would have given them some earlier momentum toward capitalization," Greeley said. "Sometimes the Trups holders can be the gatekeeper or the poison pill that precludes a bank recapitalization scenario."
Covenants within the original agreement are pivotal, and they vary widely. It is much harder if the agreement requires a majority approval from its holders on a restructuring or change in control, especially when there are a large number of holders, attorney said.
Some agreements require the holding company to always own at least 51% of the outstanding shares of the subsidiary bank, Greeley said. "If that is the case, it can be very difficult to bring in [new] capital."
A bank in on of his cases has a covenant with a group of trust-preferred holders that allowed dilution, while another group of trust-preferreds required the holding company to own 51% of the bank. In the end, the investor proposing to recapitalize the bank backed out.
Most companies are still experimenting with options, all of which are complicated to pull off unless there is a way of separating the subsidiary from the parent, lawyers said.
Most often discussed is the $1.5 billion-asset AmericanWest Bancorp in Spokane, Wash., which took a new approach — it filed Chapter 11 bankruptcy in December to force a sale of its banking subsidiary after it could not reach the trust-preferred holders to obtain the consent needed.
The $6.3 billion-asset Pacific Capital Bancorp in Santa Barbara, Calif., also managed to pull in a $500 million recapitalization from a subsidiary of the Ford Financial Fund LP in August despite failing to get enough trust-preferred investors to exchange at a discount. In the end, Ford agreed to proceed, taking on the outstanding $68 million of trust-preferreds with the deal.
Lawrence said there will be more ways of working things out as M&A activity picks up — but she isn't holding her breath.
"I'm hopeful, but I'm not overly optimistic," she said.
