Treasury Releases Capital Purchase Details: More Generous than UK Terms

The US Treasury has announced it has:

issued additional documents for publicly traded financial institutions applying for the capital purchase program authorized by the Emergency Economic Stabilization Act. Documents include:

  • Securities Purchase Agreement: This document describes the terms of the financial institution’s agreement to issue shares and fulfill other requirements in exchange for Treasury’s investment.
  • Form of Letter Agreement: This contractual agreement describes the firm-specific information necessary to implement the securities purchase agreement and represents the financial institution’s commitment to the terms of the Securities Purchase Agreement.
  • Certificate of Designations: This document creates the preferred shares.
  • Form of Warrant – Stockholder Approval Not Required: This document describes the terms of the warrants Treasury receives when stockholder approval is not required.
  • Form of Warrant – Stockholder Approval Required: This document describes the terms of the warrants Treasury receives when stockholder approval is required.
  • Term Sheet
  • SEC, FASB Letter on Warrant Accounting

It’s all at Treasury’s EESA website, under Capital Purchase Program. Of particular interest is the Transaction Report, which shows nine transactions totalling $125-billion.

The terms were announced previously:

The senior preferred shares will pay a cumulative dividend rate of 5 percent per annum for the first five years and will reset to a rate of 9 percent per annum after year five. The senior preferred shares will be non-voting, other than class voting rights on matters that could adversely affect the shares. The senior preferred shares will be callable at par after three years. Prior to the end of three years, the senior preferred may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock. Treasury may also transfer the senior preferred shares to a third party at any time. In conjunction with the purchase of senior preferred shares, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred investment. The exercise price on the warrants will be the market price of the participating institution’s common stock at the time of issuance, calculated on a 20-trading day trailing average.

In the UK, Barclays has refused to play along:

Barclays Plc, the bank that opted out of a plan to sell a stake to the U.K. government, will have Sheikh Mansour Bin Zayed Al Nahyan, a member of Abu Dhabi’s royal family, as its biggest shareholder.

Sheikh Mansour will collect interest payments of as much as 14 percent and control 16.3 percent of the London-based bank after putting up 5 billion pounds ($8 billion), the company said in a statement today. Barclays fell 13 percent after analysts at Sanford C. Bernstein & Co. said the bank is paying a “fairly expensive” price for the capital injection.

Barclays has posted details of the transaction.

The UK scheme that Barclays is avoiding was announced on October 8 has various strings attached:

As part of its investment, the Government has agreed with the banks supported by the recapitalisation scheme a range of commitments covering:

  • maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels;
  • support for schemes to help people struggling with mortgage payments to stay in their homes, and to support the expansion of financial capability initiatives;
    remuneration of senior executives – both for 2008 (when the Government expects no cash bonuses to be paid to board members) and for remuneration policy going forward (where incentive schemes will be reviewed and linked to long-term value creation, taking account of risk; and restricting the potential for “rewards for failure”);

  • the right for the Government to agree with boards the appointment of new independent non-executive directors; and
  • dividend policy

The Chancellor’s statement of October 13 contains a few more details, but no actual numbers – he noted:

These conditions are set out in the individual agreements with the banks – copies of which will be placed in the library.

The UK conditions for the preference shares are far more onerous than the US ones:

As the statement says the detailed points about the agreements with the individual banks are set out in the individual agreements contained in Deposited paper 2008/2350.

These are substantial documents and would appear, at the time of their deposit 10 am, 14 October, to still contain draft elements and be partially incomplete. Some elements however,
are worth noting are:

The Lloyds and HBOS shares are being bought at premiums to their nominal value. The precise figures appear to be undecided at time of writing. They will share equal rights with existing preference share holdings. Dividends from HBOS will fall in two periods. First, a period of up to five years will be fixed at 12%. The second period will be 7% plus LIBOR rate until their redemption. Lloyd’s dividends will be 7% plus LIBOR for the duration.

Leave a Reply

You must be logged in to post a comment.