CIB Marine Inc. in Pewaukee, Wis., is on track to turn more than $110 million of life-threatening debt into an abundance of capital and another shot at selling itself.
The $814 million-asset company got enough votes from the holders of its trust-preferred securities to proceed with a prepackaged bankruptcy filing this month. If a judge approves the plan, CIB Marine will emerge from Chapter 11 in about 60 days with the trust-preferreds converted to preferred stock — giving the now-undercapitalized holding company a healthy capital cushion.
Its success persuading investors to go along with the plan is an encouraging sign for other banks. Dozens of institutions around the country have been deferring payments on their trust-preferreds. Industry watchers expect at least some of them to do so for the maximum five years and end up owing more than they can afford to pay, as CIB Marine did.
Another group of banks aren't in a default bind but are trying to convert their trust-preferreds to common equity to boost their capital ratios.
"CIB Marine has demonstrated that it is possible to negotiate an exchange with trust-preferred holders that will provide additional regulatory capital," said Kenneth Kohler, a partner at Morrison & Foerster LLP.
For example, after the conversion, CIB Marine's total risk-based capital ratio, 3.94% at June 30, would jump to 18%.
Now CIB, which has lost $16 million in the first half, is preparing to shop itself to potential buyers; the added capital would make it a more attractive target because a buyer would not have to recapitalize the company.
"We feel great," said John Hickey Jr., CIB's chairman and chief executive. "We think the trust-preferred shareholders made the right decision."
However, even if all goes according to plan, CIB Marine will still have to deal with the slow economy and correcting the problems that have kept it from being profitable for seven years.
"Like the holding companies of many other community banks throughout the country," CIB Marine may yet "face other, substantial and even life-threatening challenges if it emerges from the Chapter 11 bankruptcy," Kohler said.
Another banking company looking to increase capital levels through an exchange is the $12.3 billion-asset Citizens Republic Bancorp Inc. in Flint, Mich. It is working on an offer to exchange some of its $150 million of trust-preferred securities and $125 million of subordinated debt for common stock.
Charlie Christy, Citizens Republic's chief financial officer, said it is not known how much capital levels will be improved by the exchange, because it is unclear how many investors will participate.
The subordinated notes, issued in 2003, are the highest priority because every year after the fifth year they lose one-fifth of their value for capital purposes. Currently, only $75 million of the $125 million is counted toward capital. Hence Citizens Republic is offering to pay 100 cents on the dollar in common stock to retire these notes, which carry a 5.75% coupon.
The company is offering $22.50 of common shares for every $25 worth of the 7.5% trust-preferreds. Christy said it is offering common stock because it is not sure investors would be as interested in converting their holdings to preferred shares, as the market for such shares has been tight since late last year.
PVF Capital Corp. in Solon, Ohio, which has been under a regulatory order to increase the capital ratios at its thrift unit, completed an exchange offer this month. The $97 million-asset company exchanged $10 million worth of trust-preferred securities for $500,000 in stock and $500,000 in cash, according to filings with the Securities and Exchange Commission. Executives there would not discuss the issue and it was unclear how much its capital levels improved as a result of the exchange.
Others are also hoping to make conversions work, but under more dire circumstances.
Greater Atlantic Financial Corp. in Reston, Va., forestalled failure this year by agreeing to sell itself to MidAtlantic Bancorp Inc. for 10 cents a share. But that deal hinges on whether Greater Atlantic can get trust-preferred holders to accept as little as 7 cents on the dollar.
In a filing with the SEC, the company said that if the trust-preferred holders agree to do so, it hopes to close the sale by the end of this quarter, but it did not say how close it was to getting that agreement from holders beyond board members.
Greater Atlantic did not return calls seeking an update, but a press release it issued in late August said directors of Greater Atlantic, along with others, had agreed to exchange 311,587 shares of trust-preferreds for 1 cent on the dollar, and give the remaining 6 cents they would have been paid to entice other holders to convert their shares. The company needs 816,627 shares, or 85% of the total outstanding, exchanged to make the deal with MidAtlantic work.
CIB's road to converting the debt to equity has been a long one. It started planning to convert the debt in December and made an offer to the trust-preferred holders early this year, but the offer did not receive the required share of votes to pass.
So the company decided to go another route, bankruptcy court, where it needed a smaller margin — half of the shares whose holders cast votes and two-thirds of the dollar amount they represent — to vote in favor of the exchange.
"The vote outside of bankruptcy was more stringent," Hickey said. "This way made it easier for us to achieve our goals."
CIB last profitable year was 2002, when it made $8.8 million. Since then, problems, including construction loans, have produced more than $200 million in losses.
Investors who receive preferred shares in the exchange could end up being able to convert some of them to common shares if the company succeeds in selling itself, Hickey said.
Moreover, even if the preferred shares remain just that, a healthier company would be able to pay dividends on them.
"As we go to talk to a strategic partner, their preferred stock gets reaffirmed by a larger company that is well capitalized and looking to pay common dividends," Hickey said. "They wouldn't be able to pay common unless they pay on the preferred stock."
Despite the depleted capital at the holding company level, the subsidiary CIB Marine Bank remains well capitalized. At June 30 its leverage ratio was 10.48%, its Tier 1 risk-based capital ratio was 13.5% and its total risk-based capital ratio was 14.77%.
The bank is operating under a cease-and-desist order from the Federal Deposit Insurance Corp. that requires it to maintain a 10% leverage ratio. The holding company is under an agreement with the Federal Reserve to maintain a leverage ratio of 4%.