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— Analysis —
Of course, things for the banking sector have only gotten worse as bottom after bottom falls out of the market and share prices continue to drop. As of last week, TPG was about 60% underwater on its investment, and Corsair was down 58%. This dreadful environment has sidelined from the sector firms such as Carlyle Capital, Kohlberg Kravis Roberts & Co., Warburg Pincus and WL Ross & Co. LLC, all of which have either expressed interest in the sector or have a history of successful investment in banks.
But the basic facts have not changed: The country's banks crave capital, and PE firms need to put to work the billions they have raised over the past couple of years. So it seems logical that, absent a systemic collapse, at some point the situation will stabilize enough to allow interested investors to bolster weakened financial institutions. But then along came the Federal Reserve. In a decision that caught
many by surprise, the Fed in June told Nat City and Corsair that a
provision of the investment, meant to protect Corsair against dilution
of its stake, was not kosher. Corsair led an investment group in a capital infusion of Nat City in April. The deal allowed Corsair and others to pay just $5 a share to take a combined 70% stake in the bank when Nat City's stock was trading at $8.33. The deal called for Corsair et al. to invest $631 million in new common stock and a further $6.37 billion in preferred stock convertible into common. The investor group, however, added a provision in the original agreement that was meant to protect it from dilution if Nat City had to return to the market to raise additional capital. As the agreement was structured, if Nat City raised money at a price lower than the $5 a share price the first group paid, the Corsair group would have to be reimbursed in stock for the difference. That provision has now been amended. In response to Fed concerns, Nat City on June 30 filed an amended agreement with the Securities and Exchange Commission that reframes the anti-dilution provision. Now the provision applies only if Nat City raises additional capital between $5 and $2.50 a share, meaning that any capital raised below that floor would not protect Corsair and its compatriots. One source close to the deal calls the Fed's decision "unduly rigid," suggesting that weakening anti-dilution protections runs counter to regulators' interest in that it will make it more difficult to entice capital into the sector, thus potentially prolonging this period of instability. "Without protection, you're not going to see investors come in to deals at any price," the source says. "Why is that a good thing?" However, it's not as though the Fed is removing all protection; it's simply fixing a range around it. One banking attorney calls the Fed's move logical because it effectively strikes a balance between giving some protection to current investors while removing a possible impediment to future capital infusions in the event of a larger collapse. For example, were Nat City's stock price to drop even lower than the $3.60 a share at which it closed on July 15, to $2.49, say, and the company needed more capital in an emergency scenario, under the old anti-dilution provision any buyer or interested investor could have been blocked by the requirement to make Corsair whole. With the amended provision in place, this impediment is gone. As one banker puts it, in the end, no investor in a bank is helped by an IndyMac-style takeover by regulators, which wipes out equity holders. "In a disaster scenario, the investment would be worthless anyway," he says. |
For months now, it's been clear the banking sector is in dire need of capital. Clear, too, has been private equity's interest in putting its billions of idle capital to work by taking stakes in the banks. At least, that was the case earlier this year, when 
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