Target: Talmer Bancorp
Price: $12.50 to $14.50 per share, or up to $226 million
Sponsor: WL Ross & Co
The maneuver, unusual in the banking industry, enabled a portfolio company, Talmer Bancorp of Troy, Michigan, to buy the assets of a failed rival without the customary guarantees that the acquiring bank would be responsible for the liabilities of the failed banks.
That provision, known as the cross guaranty liability, is designed to protect taxpayers when banks fail, but in this case, the target for the add-on deal was so severely impaired that it would have cost taxpayers more if regulators had failed to grant the waiver. Such guarantees have often discouraged buyout shops from investing in depository institutions, precisely because fund managers prefer to keep their holdings siloed, so that the failure of one portfolio company would not require a bailout by others.
Ross-backed Talmer Bancorp of Troy, Michigan, demanded—and received—a waiver from the Federal Deposit Insurance Corp from that liability in its deal for four banks owned by a Lansing, Michigan, holding company called Capitol Bancorp in a bankruptcy court sale. Talmer Bancorp is now nearing an IPO.
This case, however, is unlikely to open an avenue for increased investment by other buyout shops, said Ralph F. “Chip” MacDonald III, a partner in the financial services practice of law firm Jones Day in Atlanta. “I think Capitol was a unique situation. There is no other bank holding company like Capitol in existence.”
Such waivers are actually quite rare, used in cases where multi-bank holding companies that have healthy units need to be able to dispose of those without the potential liability from other, failing units. The FDIC granted only five such waivers in 2013, a spokesman for the agency said, and only one the year before. The technique has been in decline as the number of failing multi-bank holding companies has fallen.
WL Ross & Co, which previously had invested in troubled banks such as BankUnited Inc and Sun Bancorp Inc, bought into privately owned Talmer Bancorp in 2010, acquiring 24.1 percent of its stock in a private placement. The startup bank sought to build a Midwestern banking franchise, primarily by picking up failed banks in places such as Ohio and Wisconsin. Talmer Bancorp agreed in October to buy the last four banks owned by Capitol Bancorp, if regulators would grant the waiver.
Capitol Bancorp had an unusual structure, operating dozens of separately chartered community banks across the country, from Florida to Arizona, often in conjunction with local investors. The holding company began to struggle as a result of the financial crisis that began in 2008. As its individual units began to fail, the cross guarantee liability began to pull down the capital of healthier counterparts. It filed for a Chapter 11 reorganization in 2012. The FDIC granted some waivers on Capitol Bancorp’s healthier banks in 2009, when its first units went down, to make their takeover more attractive to buyers.
With the Talmer Bancorp deal now in hand, the Troy bank is planning an IPO that could value it at up to $1 billion, sister news service Reuters reported. The company has priced its offering at $12.50 to $14.50 per share. It plans to offer 15.6 million shares that could raise up to $226 million. The bank itself is offering 3.7 million shares, while certain shareholders—including Manulife Asset Management (US) LLC and David Einhorn’s hedge fund Greenlight Capital, in addition to Ross’s funds—are offering 11.9 million shares.
At $13.50 per share, the midpoint of the offering price range, Talmer Bancorp expects to raise $44.2 million, most of which is earmarked to pay down debt. The bank borrowed $35 million under a senior unsecured line of credit to support the Capitol Bancorp acquisition. WLR Recovery Fund IV LP and a parallel fund are offering 3.6 million shares and stand to receive $48.8 million in the IPO. The stock sale will reduce Ross’s stake to 17.9 percent from 24.1 percent.
Fund IV, launched in 2007, raised $4 billion. Investors include the California Public Employees Retirement System, the Connecticut State Treasurer and the New Jersey Division Of Investment, according to the Thomson One private equity database. As of June 30, 2013, Fund IV had a 1.8x return multiple and an 8 percent net IRR, according to CalPERS.
Ross did not respond by deadline to a request for comment.