Transcript Document

The Capital Purchase Program (CPP) vs. the
Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
November 6, 2008
Presented by:
J. Truman Bidwell Jr., Esq.
Harvey E. Bines, Esq.
John D. Ferrell, Esq.
Jay Jenkins, Esq.
Agenda
•
Overview – Jay Jenkins
•
Director Responsibilities – Truman Bidwell
•
The Capital Purchase Program – John Ferrell
•
The Temporary Liquidity Program – Harvey Bines
•
Recent Developments – Panel
•
Q&A
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
2
Overview
Presented by:
Jay Jenkins
Partner, Corporate and Financings Groups
Moderator for today’s discussion
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
3
Overview
Capital Purchase Program (CPP)
Program – $250 billion in funding authorized by the Emergency
Economic Stabilization Act of 2008 (EESA)
Purpose – To provide tier-one capital to qualified financial institutions
to increase liquidity in the financial markets and the flow of financing
to businesses and consumers
›
Allows institutions to raise capital with fewer private investors
›
Capital comes with its share of costs and restrictions
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
4
Overview
Temporary Liquidity Guarantee Program (TLGP)
Program – FDI Act authorization to mitigate systemic risk
Purpose – A true liquidity program encouraging participants to
access the markets now with a government guarantee in hand. It has
two basic parts:
›
A guarantee of certain unsecured debt issued by eligible institutions
›
Unlimited deposit insurance for certain non-interest bearing
transaction accounts at FDIC-insured institutions
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
5
Director Responsibilities
Presented by:
J. Truman Bidwell Jr.
Partner, Structured Finance Group and Corporate and
Financings Group
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
6
Director Responsibilities
•
Are the board responsibilities greater than or different from its
responsibilities generally in overseeing the bank’s activities and
setting bank policy?
›
Business Judgment Rule
›
May be subjected to more rigorous scrutiny than usual
›
The bottom line: Directors must be very sure they are fully
informed on the financial status of their bank
›
Do your homework
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
7
Director Responsibilities
•
What procedural steps (e.g., board committees, retaining
outside experts, etc.) should a board consider in evaluating
whether to participate in the CPP or the TLGP?
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
8
Director Responsibilities
•
Are there sources of “best practices” for eligible smaller banks?
•
What steps should a director consider to make himself or
herself fully informed of all facts necessary to make an
informed decision?
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
9
Director Responsibilities
•
Should the directors get a fairness opinion on the terms of the
preferred stock being offered by the Treasury?
•
What other factors should a director weigh in reaching a
decision?
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
10
Capital Purchase Program
Presented by:
John D. Ferrell
Partner, Corporate and Financings Groups
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
11
Capital Purchase Program
•
What is a “Qualified Financial Institution” that is eligible to
participate in the program? Does it include a subsidiary or
affiliate of a foreign bank?
›
Any U.S.-chartered bank, BHC, S&L or S&L HC.
›
Does not include any institution controlled by a foreign bank or
company.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
12
Capital Purchase Program
•
What are the terms of the preferred stock investment that
Treasury would make in a bank?
›
This is Senior Preferred.
›
Treated as Tier I capital.
›
Quasi-permanent capital.
• Perpetual.
• Not redeemable for 3 years except with Qualified Equity Offering.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
13
Capital Purchase Program
•
I heard on TV that common shareholders can keep on
getting dividends even though the taxpayers have, through
the Treasury, made an enormous investment in the bank. Is
that true?
›
No dividends to be paid if there are accrued and unpaid
dividends on the Senior Preferred.
›
Okay to pay on pari passu preferreds if Treasury’s preferred
gets its share.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
14
Capital Purchase Program
•
Can the bank go on increasing the common dividend?
›
Treasury’s consent required for 3 years.
›
Okay if Senior Preferred redeemed or sold to 3rd party.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
15
Capital Purchase Program
•
What if dividends are in default on Senior Preferred? Can
Treasury do anything about it?
›
•
Two directors can be appointed.
Are there any restrictions on who those directors might be?
›
Only considerations are in re “corporate governance”
requirements of NYSE or “trading facility.”
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
16
Capital Purchase Program
•
You’ve discussed to some extent the effect of the Treasury
investment on existing preferred stock issues. What should the
bank do if the terms of the Treasury program conflict with the
terms of the existing preferred, or an outstanding debt issue, or
some stockholder agreements, or any other agreements to
which the bank is a party?
›
Must review all debt and preferred stock agreements very carefully,
as well as corporate charter, by-laws, stockholder agreements, etc.
›
Must carefully ensure that any conflicts between these provisions
and those relating to the Treasury issue are properly resolved.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
17
Capital Purchase Program
•
What do you think is the single biggest objection by bank
management and directors to entering into the Senior Preferred
program?
›
•
EXECUTIVE COMPENSATION RESTRICTIONS!
Are there ways around this? What about performance-based
compensation or deferred compensation?
›
Probably not.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
18
Capital Purchase Program
•
I read that the Senior Preferred is to be issued with warrants.
How does that work?
›
Exercise price based on market price at time of investment.
›
Equal to 15% of the amount of the Senior Preferred investment.
›
Warrant runs 10 years.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
19
The FDIC’s Temporary Liquidity
Guarantee Program
Presented by:
Harvey E. Bines
Partner, Corporate and
Investment Management Groups
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
20
The FDIC’s Temporary Liquidity
Guarantee Program
•
Under what authority did the FDIC institute the Program and
what is guaranteed under the Program?
›
FDIC Act, §1823(c)(4)(G), which authorizes FDIC, when
confronted with systemic risk that can be mitigated by FDIC action,
to increase or undertake exposure to types of losses in excess of
insured limits and to creditors other than to depositors.
›
Senior debt, up to a limit (Debt Guarantee).
›
Demand deposit accounts (Transaction Account Guarantee).
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
21
The FDIC’s Temporary Liquidity
Guarantee Program
•
What are the objectives of the Debt Guarantee and of the
Transaction Account Guarantee?
›
Enhance liquidity and stability respecting inter-bank lending and
unsecured debt funding of insured institutions.
›
Promote confidence of business depositors.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
22
The FDIC’s Temporary Liquidity
Guarantee Program
•
What are the main terms of the Debt Guarantee?
›
“Senior debt” only.
›
No affiliate loans (subject to FDIC discretion).
›
Limited to 125% of value of senior unsecured debt outstanding on
September 30, 2008 (may be more or less in FDIC’s discretion).
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
23
The FDIC’s Temporary Liquidity
Guarantee Program
•
What are the main terms of the Transaction Account
Guarantee?
›
Noninterest-bearing transaction accounts only, including sweeps to
noninterest-bearing savings accounts.
›
No advance withdrawal notice.
›
Separate from temporary $250,000 insurance coverage.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
24
The FDIC’s Temporary Liquidity
Guarantee Program
•
•
What is an “Eligible Entity”?
›
Insured depository institution.
›
Bank or S&L holding company.
Are bank affiliates or subsidiaries of foreign banks excluded?
›
FDIC-approved affiliates included.
›
“Insured branch” of foreign banks excluded.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
25
The FDIC’s Temporary Liquidity
Guarantee Program
•
•
How is “senior unsecured debt” defined, and does a
participating bank have any flexibility in setting terms?
›
Uninsured borrowing memorialized in an agreement having fixed
principal and no contingencies.
›
Nothing prescribed (other than required identification of
guaranteed debt), but financial institutions in Debt Guarantee
Program subject to FDIC on-site review.
›
Customary commercial terms.
Will the debt count as part of the regulatory “capital” of the
bank?
›
The Program initiated no change with respect to regulatory capital.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
26
The FDIC’s Temporary Liquidity
Guarantee Program
•
Are there any limits on a bank’s non-guaranteed debt?
›
No non-guaranteed debt unless
• FDIC agrees otherwise
• Guarantee limit is reached
• Long-term non-guaranteed debt is issued
•
Are there any parties who are denied the benefits of the FDIC
guarantee?
›
FDIC has the power to terminate an institution’s participation
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
27
The FDIC’s Temporary Liquidity
Guarantee Program
•
What are the main actions banks should take, or decisions
banks should make, before deciding whether to participate in
or opt out of the TLGP?
›
Cost of alternate financing.
›
Risk of deposit withdrawals.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
28
The FDIC’s Temporary Liquidity
Guarantee Program
•
What actions must be taken to participate or not in either or
both guarantee programs?
›
Decision is irrevocable.
›
Affirmative opt-out of either or both required by December 5,
2008, and opt-out by any eligible affiliate is opt-out by all.
›
Election to issue certain non-guaranteed senior debt by
December 5, 2008.
›
Opt-out disclosure requirements.
›
Participating institutions must file September 30, 2008 senior debt
schedule and new guaranteed debt issuances.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
29
The FDIC’s Temporary Liquidity
Guarantee Program
•
Are there restrictions on executive compensation or
governance standards under the TLGP?
›
Program initiated no requirements not otherwise mandated by
law.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
30
The FDIC’s Temporary Liquidity
Guarantee Program
•
If a bank wants to sell itself after issuing guaranteed debt, can
the FDIC block the sale?
›
Program initiated no new merger compliance requirements.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
31
The FDIC’s Temporary Liquidity
Guarantee Program
•
If the FDIC loosens the terms of the TLGP after the bank has
already issued guaranteed senior debt, can the bank take
advantage of the more lenient provisions?
›
Program is regulatory, not contractual (in contrast to CPP).
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
32
The FDIC’s Temporary Liquidity
Guarantee Program
•
When does the guarantee of a bank’s debt and a bank’s
noninterest-bearing transaction accounts and when do
assessments begin and end?
›
Both guarantees commenced October 14, 2008 and covered all
eligible institutions, without assessment.
›
Debt Guarantee covers all senior debt issued through June 30,
2009. Debt Guarantee terminates for covered outstanding debt
regardless of maturity, on June 30, 2012.
›
Transaction Account Guarantee remains in effect through
December 31, 2009.
› Assessments commence November 12, 2008 and end:
• For the Debt Guarantee, upon the first of maturity or June 30, 2012
• For the Transaction Guarantee, December 31, 2009
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
33
Recent Developments
•
On Friday, October 31, 2008, the Treasury issued the following
notice:
“All publicly traded eligible institutions wishing to participate should
submit their applications no later than 5:00 p.m. (EDT),
November 14, 2008.
Treasury will post an application form and term sheet for privately
held eligible institutions at a later date and establish a reasonable
deadline for private institutions to apply.”
This is presumably intended primarily to assure Subchapter S filing
institutions and mutual savings banks (both of which are not permitted
to issue preferred stock) that funding will be available as soon as the
regulations are re-examined and adjusted for these institutions.
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
34
Questions?
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
35
Contact Information
Sullivan & Worcester LLP
Please visit our Credit Crisis Task Force profile at www.sandw.com.
Today’s Presenters:
J. Truman Bidwell Jr.
John D. Ferrell
[email protected]
[email protected]
(212) 660-3032
(212) 660-3039
Harvey E. Bines
Jon M. Jenkins
[email protected]
[email protected]
(617) 338-2828
(212) 660-3016
The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) —
What Bank Management Needs to Know
© 2008 Sullivan & Worcester LLP
36