ALERT: U. S. Treasury Provides Term Sheet and Information for New Capital Assistance Program
On February 25, 2009, the U.S. Treasury released a White Paper, Q&A Fact Sheet and Term Sheet with respect to the U.S. Government's new Capital Assistance Program (or "CAP") for publicly traded "qualifying financial institutions ("QFIs"). The Treasury indicated that it intends to produce separate term sheets in the future for QFIs that are not public companies as well as for Subchapter S companies. These newly released documents can be found by visiting the following Treasury Department links:
The Treasury emphasizes in the materials that the CAP is designed to continue the process of restoring confidence in the U.S. financial system by increasing confidence in the amount and quality of capital held by financial institutions. The Treasury maintains that the program does NOT represent a new capital standard and that it is not expected to be maintained on an ongoing basis. The capital that will be provided under the program, as explained in more detail below, is a form of preferred stock which is convertible into common equity. The Treasury has indicated that this instrument is intended to "serve as a source of contingent common capital ..., convertible into common equity when and if needed to retain the confidence of investors or to meet supervisory expectations regarding the amount and composition of capital." The instrument is designed to give banks the incentive to redeem or replace the government-provided capital when feasible. Further, with supervisory approval, banking organizations that have participated in the TARP Capital Purchase Program ("CPP") will be allowed to exchange their existing TARP preferred stock for the new instrument. Existing TARP CPP participants are NOT required to exchange their instruments. The CAP program is a new, additional program which does NOT supplant or replace the existing CPP program.
The Treasury has indicated that federal banking and thrift supervisors are conducting a coordinated supervisory capital planning exercise with each of the 19 major U.S. banking organizations whose assets at the end of last year exceeded $100 billion. This is the so-called "stress testing" that has been extensively reported. This Client Alert does not go into the characteristics of the stress testing, which is covered in some detail in the White Paper. Those institutions which, upon conclusion of the testing, are determined to need additional capital in order to remain well-capitalized under the more adverse scenario that is included in the stress test, will be given a six month period to raise any additional capital from private sources first if they so desire. They may also apply to participate in the CAP at the conclusion of the testing but may delay funding for six months to have the opportunity to raise as much private capital as possible.
As a general matter, for those who are familiar with the CPP for public institutions, this program is similar in that the U.S. Treasury will invest in both preferred stock and warrants. However, while some of the terms are similar, there are severable notable differences.
Institutions that are eligible to participate--QFIs-- are U.S. banks or savings associations or U.S. banks or savings and loan holding companies that in each case are "publicly traded," as defined. In order to qualify for the CAP, an applicant that is not a bank or thrift holding company must have been approved to become one by January 15, 2009, which was the same date as in the CPP. An institution need not have participated in the CPP to be eligible to participate in the CAP. The eligibility requirements to participate in the CAP are stated to be "substantially similar" to those used for the CPP. The application form will be slightly different than what was used for the CPP and will be available through the web site of the primary federal banking regulator.
The investment will consist of a class of convertible preferred stock ("Convertible Preferred'), which is intended to count as Tier 1 capital for holding companies. The Convertible Preferred will rank pari-passu to existing senior preferred stock and senior to junior preferred stock and common stock. The Convertible Preferred stock will pay cumulative dividends at a rate of 9% per annum, compounded quarterly. (The interest rate will increase to 20% on the sixth month from issuance if consent of stockholders of the QFI is required in connection with the transaction and has not been obtained.) The issuance of Convertible Preferred by a CPP participant will be deemed to constitute a "qualifying equity offering" to the extent the proceeds are used to redeem the preferred stock sold to the Treasury under the CPP Program. In addition, proceeds that are used to redeem such preferred shares issued under the CPP will count toward the proceeds of qualifying equity that must be raised to reduce the number of shares of common stock underlying the warrant that was issued to the Treasury under the CPP.
The Convertible Preferred will mandatorily convert to common stock seven (7) years after its issuance, at the Conversion Price, which is 90% of the average closing price for the common stock for the 20 trading day period ending February 9, 2009, subject to anti-dilution adjustments. There are further reductions in the Conversion Price to the extent that the QFI has not obtained any required stockholder vote that is necessary to be called by the QFI in connection with the transaction after the six month anniversary of the closing of the transaction. The Convertible Preferred is otherwise convertible at any time in whole or in part at the Conversion Price at the option of the QFI, subject to approval of the primary federal banking agency. The instrument may also be converted at the option of the QFI on the happening of certain specified corporate events, such as certain sales, mergers or changes in control.
The Convertible Preferred may be redeemed, subject to the approval of the primary federal banking agency, in whole or in part at any time solely with the proceeds of one or more issuances of common stock for cash which results in aggregate gross proceeds to the QFI of at least 25% of the issue price of the Convertible Preferred, or from additions to retained earnings. For the first two years, redemptions may be at par plus any accrued and unpaid dividends. Thereafter, redemptions will be at the greater of par plus accrued and unpaid dividends and the as-converted value. Following the redemption in whole of the Convertible Preferred, the QFI will have the right to repurchase at fair market value the warrant issued to the Treasury in the transaction (as discussed below), as well as any common stock than held by the Treasury.
For as long as the Convertible Preferred is outstanding and owned by the Treasury or the Treasury owns any common stock, no dividends may be declared or paid on junior preferred stock or parri passu preferred stock (other than on a pro rata basis) or on common stock, nor may the QFI repurchase or redeem such shares, unless all accrued and unpaid dividends for all past dividend periods have been fully paid. Moreover, under the same circumstances, unless the Treasury consents to a higher amount, dividends declared and paid on common stock may not exceed $0.01 per share per quarter. Also under the same circumstances, the QFI will also be restricted in repurchasing any of its equity securities or trust preferred securities without the Treasury's consent, except for those circumstances that have been previously allowed under the CPP, as set forth in Section 4.8 of the Stock Purchase Agreements entered into in connection with such issuances.
The Convertible Preferred will not be subject to any contractual restrictions on transfer. The QFI is to file a shelf registration statement covering the Convertible Preferred and the underlying shares of common stock as promptly as possible and take all action necessary to cause such registration statement to become effective. The QFI is to grant the Treasury piggyback registration rights, and do whatever else may be reasonably required to facilitate the transfer of the Convertible Preferred, including listing such instrument on a national securities exchange. The QFI is required to apply to list the underlying common stock on the national exchange on which the common stock is than traded.
After the mandatory conversion date, the Treasury will take reasonable efforts to sell on an annual basis an amount of common stock equal to at least 20% of the total common stock owned by the Treasury. Following conversion of the Convertible Preferred, subject to approval of the QFI's primary federal banking regulator, the QFI shall have the right to repurchase any of such shares of common stock at a price equal to the greater of the Conversion Price and the market price of common stock on the date of repurchase (calculated based on the average closing price during the 20 trading day period beginning on the day after notice of repurchase is given).
The Convertible Preferred will have no voting rights other than class voting rights with respect to:(i) issues of senior preferred securities; (ii) issues which impact the rights of the Convertible Preferred; or (iii) in connection with a merger, exchange or similar transaction where the rights of the Convertible Preferred are adversely affected. If dividends on the Convertible Preferred have not been paid in full for six dividend periods, whether or not consecutive, the Convertible Preferred will have the right to elect two directors, who will serve until full dividends have been paid for four consecutive dividend periods.
The Treasury will receive warrants to purchase a number of shares of common stock having an aggregate market value equal to 20% of the Convertible Preferred amount on the date of the investment. The initial exercise price for the warrants and the market price for determining the number of shares of common stock to be subject to the warrant shall be the Conversion Price, subject to ant-dilution adjustments. The exercise price will be reduced to the extent that necessary shareholder votes of the QFI in connection with the transaction have not been obtained by the six month anniversary date of the transaction. The warrants shall be immediately exercisable and shall have a term of 10 years. Like the Convertible Preferred, the warrants are not subject to any contractual restrictions on transfer, and the QFI is required to promptly file a shelf registration statement covering both the warrant and the shares of common stock exercisable upon exercise of the warrants. The Treasury has indicated that it does not intend to exercise voting power with respect to any shares of common stock of the QFI issued to it upon exercise of the warrants.
The minimum investment for institutions which are considering participation is in an amount equal to 1% of risk-weighted assets and the maximum amount is not more than 2% of its risk weighted assets PLUS any further amount of Convertible Preferred to the extent the proceeds are used to redeem the preferred shares issued under the CPP. Further, a QFI may request approval of the appropriate federal banking agency to issue Convertible Preferred in excess of the foregoing limits, referred to as "exceptional assistance." Approval is in the sole discretion of the Treasury and the appropriate federal banking agency on a case-by-case basis and may be subject to the imposition of additional terms and conditions.
Any participating institution would have to agree to all of the executive compensation, transparency, accountability and monitoring limitations published by the Treasury and in effect at the time of the closing of the investment.
The deadline for public institutions to apply to participate in the CAP is May 25, 2009.
Please contact the Patton Boggs professionals below if you have any questions.
Contributors: Norman B. Antin, Jeffrey D. Haas, Joseph G. Passaic, Kevin M. Houlihan, Carol R. Van Cleef