the capital purchase program (cpp) vs. the temporary liquidity guarantee program (tlgp) — what...

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.

The Capital Purchase Program (CPP) vs. the Temporary Liquidity Guarantee Program (TLGP) — What Bank Management Needs to Know © 2008 Sullivan & Worcester LLP

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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


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Presented by:

Jay Jenkins

Partner, Corporate and Financings Groups

Moderator for today’s discussion

Overview


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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

Overview


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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

Overview


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Presented by:

J. Truman Bidwell Jr.

Partner, Structured Finance Group and Corporate and Financings Group

Director Responsibilities


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• 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


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• 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?


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• 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?


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• 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?


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Presented by:

John D. Ferrell

Partner, Corporate and Financings Groups

Capital Purchase Program


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• 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.


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• 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.


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• 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.


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• 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.


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• 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.”


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• 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.


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• 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.


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• 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.


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Presented by:

Harvey E. Bines

Partner, Corporate and Investment Management Groups

The FDIC’s Temporary Liquidity Guarantee Program


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• 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).


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• 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.


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• 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).


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• 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.


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• 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.


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• 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.


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• 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


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• 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.


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• 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.


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• Are there restrictions on executive compensation or governance standards under the TLGP?

› Program initiated no requirements not otherwise mandated by law.


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• If a bank wants to sell itself after issuing guaranteed debt, can the FDIC block the sale?

› Program initiated no new merger compliance requirements.


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• 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).


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• 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


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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.


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Questions?


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J. Truman Bidwell Jr.

[email protected]

(212) 660-3032

Harvey E. Bines

[email protected]

(617) 338-2828

Contact Information

John D. Ferrell

[email protected]

(212) 660-3039

Jon M. Jenkins

[email protected]

(212) 660-3016

Sullivan & Worcester LLP

Please visit our Credit Crisis Task Force profile at www.sandw.com.

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the capital purchase program (cpp) vs. the temporary liquidity guarantee program (tlgp) — what...

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