It seems so obvious: Banks are strapped for cash and struggling to claw their way back from the Great Recession. Buyout funds are sitting on cash and looking for attractive places to invest. Now the question is whether regulators will ease up enough to bring the two together.
Without question regulators are showing new willingness to accept such non-traditional investors as the financial crisis lingers. On Jan. 22, the Federal Deposit Insurance Corp. approved the sale of failed $350 million-asset Premier American Bank, of Miami, to the New York firm Bond Street Holdings LLC, in what appears to be the first use of a so-called “shelf charter.”
Such a charter, which commits its participants to backing investments in a “blind pool” without knowing in advance what they will be, is the banking industry’s version of a “blank check company,” a corporate shell that raises money in a private offering before going off in search of deals. The approach is the latest version of an evolving government strategy to bring fresh capital to a beleaguered financial industry.
Attorney Ralph F. “Chip” MacDonald III, a partner in the financial services practice of law firm Jones Day, predicted more such investments to come. “The ones we’re talking about are just the tip of the iceberg,” said MacDonald, who follows such developments for his firm. Indeed, the FDIC has 552 banks on its troubled institutions list, according to Dory A. Wiley, the president of Commerce Street Capital LLC, a Dallas investment bank.
Buyout firms have accumulated plenty of dry powder that could be deployed in the troubled banking sector. According to Buyouts data, firms specializing in financial services investing have raised more than $14.8 billion since 2007, including $500 million by San Francisco buyout shop
Indeed, the mid-January shelf-chart deal appeared to be the first undertaken under a policy that the FDIC adopted last August, setting out guidance for what it called “private capital investors” seeking to buy failed banks.
The original proposed policy, put out for comment in July, drew more than 60 comment letters, many of them from buyout firms complaining that it was too restrictive. The proposal would have required a minimum three-year holding period for buyers of failed banks, along with a 15 percent capital ratio, triple the standard for conventional banks to be considered well capitalized. It also would have required organizers to comply with the requirements of the Bank Holding Company Act of 1956. The policy that emerged in August eased some of those concerns by, for instance, freeing small investors, those owning 5 percent of a bank or less, from the three-year holding rule.
But banking deals sponsored by traditional buyout shops have been sparse, and it’s not yet clear the regulatory climate will warm sufficiently to attract them.
MacDonald of Jones Day said the shelf-charter banks are less likely to be structured as conventional private equity partnerships and more typically as stock companies, customized to meet the FDIC’s policy, perhaps with multiple classes of shares or warrants offered as sweeteners. They typically are designed for qualified institutional investors and perhaps a limited number of accredited individual investors. Much as buyout shops would be likely to do, investors backing such companies are placing their bets on the management teams who are spearheading the takeover of failed banks.
In the case of Bond Street, for instance, which raised $440 million last year in a private offering from a group of 65 investors, its CEO is Daniel M. Healy, who had formerly been chief financial officer at North Fork Bancorp in New York before that company’s sale to Capital One Financial Corp. in 2006. Bond Street’s chairman and executive managing director, Vincent Tese, is a former superintendent of the New York State Department of Banking.
Another private capital bank takeover, BankUnited in Coral Gables, Fla., is run by Healy’s old boss, North Fork CEO John Kanas, who led a consortium of buyout shops, including
Likewise, Jay S. Sidhu, the former chairman of Sovereign Bancorp, took a sojourn through the private equity and money-management businesses before returning to banking last fall, raising $13.6 million in capital for the $265 million-asset New Century Bank in Phoenixville, Penn., through a stock offering and becoming its chairman and chief executive.
The BankUnited and New Century deals came together under an earlier set of bank ownership rules, under a policy that the Federal Reserve Board adopted in September 2008. Charter-granting agencies—the Office of the Comptroller of the Currency for bank charters and the Office of Thrift Supervision for savings institution charters—have shown some support for new market entrants, but the FDIC has been cautious about extending deposit insurance to them.
“The FDIC has incredible discretion,” Jones Day’s MacDonald said. And the criteria continue to evolve. The FDIC posted a list of “frequently asked questions” on its Web site in December, only to pull the list down and repost a revised version in January. And last August, the FDIC said it would revisit its policy toward private investors in banks in six months, a term that expires in February.
In the meantime, shelf charters are the vehicle of choice for now. The week after its Premier American Bank deal, on Jan. 29, Bond Street landed another deal, this time for $875 million-asset Florida Community Bank in Immokalee. At the same time, the FDIC approved the sale of another bank, $833 million-asset First National Bank of Georgia, in Carrollton, to another newly chartered bank, Community & Southern Bank, also of Carrollton.
MacDonald predicted regulators would seek new ways for private investors to participate. “The FDIC has a shrinking pool of investors who are interested in failed-bank acquisitions,” he said. “The FDIC is going to work with investors to find ways to make this work.”
Decker of Belvedere Capital said greater flexibility by the agencies could attract more private money to a market that historically has been resistant to outsiders.
“The regulators are absolutely in charge in this environment,” he said. “They’re creating an opportunity for fresh capital to come in, but with some oversight, guidelines and restrictions. It’s a complex environment, and it’s not for the faint of heart.”