In its press release issued on May 4, 2011, Bryan Cave client Brand Group Holdings, Inc. (the “Company”) announced the successful completion of its recapitalization. The total amount raised in the initial phase of this effort was $125 million, and the three largest investors in the recapitalization, affiliates of The Carlyle Group, The Stephens Group, and the Cousins’ family, invested approximately $96 million, with various other investors investing approximately $29 million. The investors have agreements in place with the Company to invest an additional $75 million in capital at a later date.
A unique feature of this transaction is a valuation adjustment that utilizes a stock escrow arrangement. Some of the purchased shares will revert from the new investors to the legacy shareholders if the existing loan portfolio performs better than the investors have projected.
As a result of the recapitalization, the Company is among the best capitalized financial institutions, among those with over $1 billion in assets, in Georgia. The Company’s Total Risk-Based Capital Ratio stands at over 24%. The Company anticipates that its wholly owned subsidiary bank, The Brand Banking Company, will use proceeds from the recapitalization to enhance its current offerings and expand into new banking services.
Background
On July 2, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) issued for public comment a proposed Statement of Policy that sets forth the qualifications for private equity investors in failed bank acquisitions (the “Proposed Policy”). The FDIC established a 30-day comment period and sought public comment on nine topics:
- definition of private equity investor and scope of the policy;
- permissibility of “silo” structures;
- capital requirements;
- applicability of the source of strength doctrine;
- imposition of cross-guarantee liability;
- restrictions on bidders from bank secrecy jurisdictions;
- post-investment holding period;
- possible limitations on 10% investors in failed institutions; and
- length of restriction period.
On August 26, 2009, the FDIC issued its Final Statement of Policy on Qualifications for Failed Bank Acquisitions (the “Final Policy”). The FDIC notes that the policy statement is just that—a statement of policy and not a statutory provision imposing civil or criminal penalties and that the requirements it imposes on investors only apply to investors that agree to its terms.
In response to 61 comment letters from a broad variety of interests, in the Final Policy the FDIC reduced the proposed capital requirements, removed the proposed “source of strength” requirement, and increased the ownership threshold for cross-guarantee liability. These changes are intended to make the failed bank acquisition opportunity more attractive for private equity investors, while retaining many of the other elements of the Proposed Policy that address the FDIC’s apparent concerns about such investors.
The Final Policy is relevant only to bidders for failed financial institutions. Investors seeking to acquire control of banks that have not failed should refer to the Bank Holding Company Act and the relevant regulations and policy statements issued by the Federal Reserve Board including, but not limited to, the policy statement issued by the Federal Reserve Board on September 22, 2008 that eased certain limitations on private equity investments in banks and bank holding companies. This policy statement is summarized in our prior client alert on private equity investments generally. Investors seeking to acquire control of federal savings institutions that have not failed should refer to the Home Owners’ Loan Act and relevant regulations issued by the Office of Thrift Supervision. These existing holding company statutes and regulations are not replaced or substituted by the Final Policy. The Final Policy merely adds additional limitations and requirements in the context of acquiring failed financial institutions.
We understand that several banks have been told that the bank needed to raise sufficient new private capital so that, following a TARP Capital infusion, the bank would:
- have total non-performing assets that are less than 100% of the resulting capital;
- have total classified assets that are less than 100% of the resulting capital; and
- be in compliance with the Commercial Real Estate guidance (total Commercial Real Estate loans of less than 300% of resulting capital, and total Acquisition, Development and Construction loans of less than 100% of the resulting capital).
We don’t think this is exclusive or automatic, but we do find it logical for some banks, and a good argument for others to use. For those banks that cannot satisfy the requirements of the Commercial Real Estate guidance, we believe that a tangible reduction schedule may suffice.
Yesterday’s New York Times article on whether banks are making loans (an interesting read if you haven’t already), also provides a graphic showing the Texas ratio of banks that received TARP Capital investments through December 31, 2008. While there are certainly flaws in the Texas ratio, we believe it is informative that the worst September 30th Texas ratio of any bank that received TARP Capital through December 31, 2008 was 77.4%.
On November 26, 2008, the FDIC issued a press release outlining a new plan to allow parties that do not have a bank charter to bid on failing institutions. We will keep you up to date as additional details emerge on this new plan. Below is the complete text of the FDIC’s press release.
Our September 25, 2008 Client Alert analyzes the impacts of the Federal Reserve’s new policy statement easing the limitations on private equity investments in banks and bank holding companies.