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The Finesse Job that Kept Broadway Financial Out of Bankruptcy

Broadway Financial (BYFC) has confronted just about every problem a small bank can face, including credit woes, consent orders and erroneous financial statements.

By pulling off a difficult rescue, the Los Angeles company has shown its resiliency while proving that it is possible for a troubled bank to get creditors to agree to a complex restructuring — without resorting to bankruptcy.

Broadway, which has struggled with exposure to church loans, managed to restructure its debt and recapitalize by bringing together the federal government, private equity, a handful of nonprofits and local banks. The rescue took three years of negotiation as management worked to get everyone on board.

For Wayne-Kent Bradshaw, the $346 million-asset company's president and chief executive, bankruptcy was never an option.

"From a character standpoint, we had no interest," he says. "People give you their money and their trust. It was our job to figure out how to fix things."

It took considerable time and patience to get there. Broadway began working on the recapitalization in 2010, completing the process in August and registering new stock earlier this month.

Broadway managed to trade common stock for about $22.8 million in Troubled Asset Relief Program preferred shares and other obligations, while also raising more than $4 million. The restructuring was made up of privately negotiated transactions with each participant, which required endless rounds of discussions and collaboration with regulators.

"It was one of the most complex transactions I've ever dealt with as an investment banker," says Paul Hughes, managing director at BlackTorch Capital, who worked with Broadway. "We weren't trying to make it complicated — the initial step was to put out a simple private placement."

When Hughes first tried to raise capital, investors balked at Broadway's complex capital structure, which consisted of common stock, five separate classes of preferred stock, subordinated debt and a bank loan. The company was too small to appeal to private-equity firms, which usually prefer to invest at least $50 million but also need to keep their ownership stakes under 25% to avoid registering as a bank holding company, Hughes says.

The Treasury was the first party to agree to restructure Broadway's debt, and effectively set the terms for everyone else, Bradshaw says. The Treasury agreed to exchange Broadway's $17.6 million in Tarp shares, the largest single liability, for common stock at a 50% discount. But the government would only agree to the exchange if the company raised capital, and if other preferred shareholders accepted the same discount.

The Treasury's terms were "not an easy sale" to the other creditors, Bradshaw says. Broadway is also operating under consent orders with the Federal Reserve Board and the Office of the Comptroller of the Currency, and it needed the regulators' blessing for the plan. The deal was further delayed by the debt-ceiling crisis in the summer of 2011, which halted talks with regulators, and by a problem with some of Broadway's financial statements, which had to be restated.

Today, the Treasury owns 52% of Broadway, holding about $8.8 million of the company's common stock. Broadway is one of five companies with common stock held by the Treasury as a result of a Tarp exchange, and it is the only one majority owned by the government, according to the latest Tarp report.

The Treasury typically moves quickly to cash out of such holdings, says Rob Klingler, a partner with Bryan Cave in Atlanta. For now, the stake is unlikely to scare off investors — the Treasury vowed to be hands-off and vote along with the majority — but the government could have trouble finding investors to buy such a large block of shares, he says.

The Treasury would likely give Broadway "a very meaningful runway to work something out" with prospective buyers when it finally decides to cash out, Bradshaw says. A sale would likely give control to another bank holding company, which is "not a frightening prospect," Bradshaw says. Another option could involve a dispersion among several different investors.

Broadway's other key owners are institutional investors. A fund affiliated with the private-equity firm Gapstow Capital Partners is the lead investor, owning a 9.6% stake. BBCN Bancorp (BBCN) and Cathay General Bancorp (CATY) also have stakes in Broadway, along with the Automobile Club of Southern California and the nonprofit National Community Investment Fund.

Broadway has no time to rest after the debt restructuring; it is looking to conduct private placement to address $6 million in subordinated debt before interest payments come due in March. A simplified capital structure should help. "We now have a decent structure to raise capital and grow the bank," Bradshaw says.

The company still has challenges as it looks to attract investors. Nonperforming assets made up 7% of total assets at Sept. 30. Still, credit quality has improved, making a capital raise "a more realistic probability than it might have been a year ago," says Karen Dorway, president of Bauer Financial.

Broadway is still aiming for consistent profits. After making money in 2012, it had a loss of $260,000 in the first nine months of last year.

But management is in a position to lend, and it is focusing on making small multifamily loans of $500,000 to $2.5 million. "We're making certain that all the wheels are screwed on tightly and there's gas in the tank, and trying to make sure we're the best at what we do — making loans in the central Los Angeles area," Bradshaw says.

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