Last week, the U.S. Treasury released three separate public term sheets and related FAQs for Capital Purchase Program (CPP) investments in mutual holding companies or their stock holding company subsidiaries. Specifically, the term sheets provide for (i) the issuance of senior preferred stock at publicly traded subsidiary holding companies with a mutual top-tier parent; (ii) the issuance of senior preferred stock at private subsidiary holding companies with a mutual top-tier parent; and (iii) the issuance of debt by top-tier mutual holding companies that do not have a subsidiary holding company. The application deadline for participation by qualified financial institutions (QFIs) is 5:00 p.m. EDT May 7, 2009, however final approval of the holding company application must have been granted by the applicable federal banking agency by January 15, 2009 to be eligible to participate in the CPP. QFIs should use the standard CPP application form, available at www.financialstability.gov and on the public web sites of each federal banking agency. Treasury expects forms of definitive agreements to be available within the next few weeks.
Key components of the three term sheets and any material differences among them and from the previously released term sheets for Non-MHC public issuers ("Public QFIs"), Non-MHC/Non-Public issuers (other than S corporations and mutual organizations) ("Non-Public QFIs"), and S corporations ("S Corp QFIs") include the following:
Public Holding Company With Top Tier MHC (Public MHC) - The terms attributable to Public MHC QFIs are nearly identical to that of Public QFIs except with respect to redemption of the Senior Preferred as noted below:
- QFIs- Any bank holding company (BHC) or savings and loan holding company (SLHC) that (i) engages solely or predominantly in activities permissible for financial holding companies; (ii) is "publicly traded"; and (iii) is directly owned or controlled by a BHC or SLHC organized in mutual form; and such BHC and SLHC shall not be controlled by a foreign bank or company. Institutions that are "publicly traded" include (1) companies whose securities are traded on an national securities exchange and (2) required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator.
- Subscription Amount - Minimum subscription of 1% of risk-weighted assets; maximum subscription of 3% or risk-weighted assets (or $25 billion, whichever is less).
- Security Purchased - Treasury is purchasing Tier 1 perpetual preferred stock ("Senior Preferred"), liquidation preference of $1,000 per share; which will be senior to common and junior preferred stock and pari passu with any existing senior preferred stock.
- Dividend and Repurchase Restrictions - Senior Preferred will bear cumulative dividends of 5% per annum for the first five years and 9% thereafter. For so long as the Senior Preferred is outstanding, the Public MHC QFI may not pay other dividends or repurchase shares, unless it is current on payment of dividends on the Senior Preferred. In addition, Treasury's consent will be required for any increase in common stock dividends and any stock repurchases until the earlier of three years, full redemption of the Senior Preferred, or Treasury transfers all such Senior Preferred to a third party.
- Voting Rights - The Senior Preferred stock will be non-voting, except on class specific matters on which the preferred stock typically votes (including the right to elect two directors if dividends are unpaid for six dividend periods.
- Transfer of Shares - Treasury may transfer shares to any third party at any time, and will receive registration rights to facilitate transfers.
- Redemption - Redemptions of the Senior Preferred may be undertaken at any time and shall be at 100% of the issue price, plus any accrued and unpaid dividends, and further subject to the approval of the Public MHC QFI's primary federal bank regulator. Following the redemption in whole of the Senior Preferred held by Treasury, the Public MHC QFI may repurchase any other of its equity security held by Treasury (including presumably any unexercised warrant) at fair market value. In contrast, Public QFIs, during the first there years of Treasury investment, may only redeem Senior Preferred with the proceeds of a qualifying equity offering of Tier 1 perpetual preferred or common.
- Warrants - To comply with Economic Emergency Stabilization Act of 2008 requirements that Treasury obtain warrants or other contingent consideration when purchasing troubled assets, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the senior preferred investment. The warrants will have a ten-year term and a per share exercise price equal to the market price of the Public-MHC QFI’s common stock at the time of issuance (calculated on a 20-trading day trailing average). If the Public MHC QFI has raised Tier 1 capital at least equal to the full amount of the preferred stock before December 31, 2009, the number of warrants will be cut in half.
- Executive Compensation/Transparency - The Public MHC QFI and its covered officers and employees shall agree to comply with the rules, regulations and guidance of Treasury with respect to executive compensation, transparency, accountability and monitoring, as published and in effect at the time of the investment closing.
Non-Public Holding Company With Top Tier MHC (Non-Public MHC) - The terms attributable to Non-Public MHC QFIs are quite similar to Public MHC QFIs, and nearly identical to that of Non-Public QFIs, except with respect to redemption of the Senior Preferred and the issuance of warrants as noted below:
- QFIs - The definition of a QFI parallels the definition of Public MHCs except that Non-Public MHC QFIs are not publicly traded.
- Subscription Amount - Same as Public MHC QFI.
- Security Purchased - Same as Public MHC QFI.
- Dividend and Repurchase Restrictions - Senior Preferred dividend payments and restrictions are the same as Public MHC QFIs, except that from year four until year ten, a Non-Public MHC QFI may only increase common stock dividends up to 3% per year, and must obtain Treasury approval to increase more than 3%, and from and after year ten, a Non-Public MHC QFI cannot pay dividends on parity or junior stock or repurchase any equity securities or trust preferred securities. Limitations on repurchases of equity securities and trust preferred securities by Non-Public MHC QFIs is also extend through year ten. The foregoing restrictions do not apply if all equity securities held by Treasury are redeemed in whole or Treasury has transferred all of its equity securities to third parties.
- Redemption - Same as Public MHC QFI. Non-Public MHC QFIs, in contrast to Non Public QFIs, may call the Senior Preferred at any time at 100%, whereas Non-Public QFIs, during the first there years of Treasury investment, may only redeem Senior Preferred with the proceeds of a qualifying equity offering of Tier 1 perpetual preferred or common.
- Voting Rights - Same as Public MHC QFIs.
- Transfer of Shares - The Senior Preferred issuable to Treasury will not be subject to any contractual restrictions on transfer or the restrictions of any stockholders’ agreement or similar arrangement that may be in effect among the Non-Public MHC QFI and its stockholders at the time of Treasury’s preferred stock investment or thereafter; provided that Treasury and its transferees agree not to effect any transfer of the preferred stock which would require the Non-Public MHC QFI to become subject to the periodic reporting requirements of Section 13 or 15(d) of the Exchange Act. If the Non-Public MHC QFI otherwise becomes subject to public company reporting requirements, it will file and cause to be declared effective a shelf registration statement covering the preferred stock issued to Treasury. In addition, Treasury and its transferees will have piggyback registration rights and the Non-Public MHC QFI will further agree to take all steps that may be reasonably requested to facilitate the transfer of the preferred stock.
- Related Party Transactions - Non-Public MHC QFIs will be subjected to limitations on related-party transactions akin to those typically applicable to public companies in that, so long as Treasury holds any equity securities of the Non-Public MHC QFI, the Non-Public MHC QFI and its subsidiaries will not enter into any transactions with related persons (within the meaning of Item 404 under the SEC’s Regulation S-K) unless (i) such transactions are on terms no less favorable to the Non-Public MHC QFI and its subsidiaries than could be obtained from an unaffiliated third party, and (ii) have been approved by the audit committee or comparable body of independent directors.
- Warrants - The warrant for Non-Public MHC QFIs is very different from the warrant issued by Public-MHC QFIs. Non-Public MHCs will issue a warrant to purchase (for a nominal purchase price) additional shares of preferred stock having an aggregate liquidation preference equal to 5% of Treasury’s initial preferred stock investment. The warrant preferred stock will be identical to the Senior Preferred initially issued to Treasury, except the dividend will be 9% from the date of issuance and the shares may not be redeemed until the initial Senior Preferred stock is redeemed in full (i.e., the 9% warrant preferred stock is the last tranche of preferred stock that the company can redeem). Although the warrant has a ten-year term, Treasury has indicated its intent to immediately exercise the warrant. This warrant structure does not offer the same potential appreciation as the Public MHC QFI warrant, but it does lock in an additional return for Treasury on its investment. In addition, unlike the warrants issued by Non-Public QFIs, Non-Public MHC QFIs and Public MHC QFIs both have the opportunity to reduce the size of the issued warrants by half, by raising new Tier 1 equity prior to the end of 2009.
- Executive Compensation/Transparency - Same as Public MHC QFI.
MHC - The terms attributable to MHC QFIs are nearly identical to those of S Corp QFIs except with respect to redemption of Senior Securities and issuance of Warrant Securities as noted below:
- QFIs - The definition of a MHC QFI includes a BHC or SLHC that is (i) mutual in organization; (ii) engages solely or predominantly in activities permissible for financial holding companies; and (iii) does not directly own and control a BHC or SLHC.
- Subscription Amount - Same as terms for all CPP QFIs.
- Security Purchased - Treasury is purchasing 30 year subordinated debentures, each note representing a principal amount of $1,000, paying interest at 7.7% per annum until the 5th anniversary of investment and at a rate of 13.8% per annum thereafter ("Senior Securities"). The interest rates for the Senior Securities are higher than the dividend rates of the preferred stock obligations of other QFIs because the interest paid on the Senior Securities is tax deductible while the dividend payment on the preferred stock investments is not. The Senior Securities will not constitute a second class of stock, however they will rank senior to a MHC QFI's capital certificates (and any other capital instruments authorized under state law, as applicable), and must be subordinated to senior indebtedness of the MHC QFI, unless such debt obligations are explicitly made pari passu or subordinated to the Senior Securities. In addition, the Senior Securities will be classified as Tier 1 capital (it being anticipated that prior to Treasury investing, the MHC QFI's appropriate federal banking agency regulator issuing an interim final rule permitting inclusion of the Senior Securities in Tier 1 capital).
- Dividend and Repurchase Restrictions - Like the terms attributable to the preferred stock issues, MHC QFIs are prohibited from increasing any regularly paid common dividends for the first three years from the date of investment without Treasury consent. From year four through year ten, Treasury approval is required for a MHC QFI to pay extraordinary dividends on deposit accounts or to increase aggregate common dividends per share or certificate greater then 103% of the prior year's dividend rate, unless Treasury's investment has been redeemed in whole or Treasury has transferred its investment to unaffiliated parties. With respect to repurchase restrictions, Treasury approval is required to repurchase equity securities, mutual capital certificates or trust preferred securities until the 10th anniversary of the investment unless Treasury's investment is redeemed in whole or Treasury has transferred its investment to a third partie(s), and from and after year 10, a MHC QFI cannot repurchase any equity securities, capital certificates or trust preferred securities or pay dividends until the Treasury investment is redeemed in whole (note a slight difference in that a Non-Public QFI and Non-Public MHC QFI, from and after year 10, may repurchase equity or trust preferred securities or pay common dividends upon full redemption of the Senior Preferred or Treasury's transfer of such securities to third parties).
- Voting Rights - The Senior Securities will be non-voting, except on class-specific matters (including the right to elect two directors if interest is unpaid for six interest periods, whether or not consecutive, such right to end upon full payment of all prior unpaid interest).
- Transfer of Shares - Treasury may transfer the Senior Securities to any third party at any time, provided that, Treasury will use commercially reasonable efforts not to effect any transfer that would require the MHC QFI to become subject to any periodic public reporting requirements pursuant to the Exchange Act. If the MHC QFI otherwise becomes subject to such public reporting requirements, it will file a shelf registration statement and Treasury and its transferees will receive registration rights to facilitate any transfers.
- Redemption - Same as Public MHC and Non-Public MHC QFIs. MHC QFIs, in contrast to S Corp QFIs, may call the Senior Securities at any time whereas S Corp QFIs, during the first there years of Treasury investment, may only redeem Senior Securities with the proceeds of a qualifying securities offering which qualifies for at least the same tier or higher of regulatory capital as the Senior Securities.
- Warrants - Treasury will receive warrants with an exercise price of $0.01 to purchase additional Senior Securities ("Warrant Securities") in an amount equal to 5% of the initial Senior Securities investment. The warrants will have a 10-year term (with the Warrant Securities themselves having a maturity of 30 years), however Treasury intends to immediately exercise the warrants. The warrants shall have the same rights, preferences, privileges and voting rights and other terms as the Senior Securities, except the Warrant Securities will pay interest at 13.8% per annum and may not be redeemed until all Senior Securities have been redeemed. In addition, unlike the warrants issued by S Corp QFIs, MHC QFIs have the opportunity to reduce the size of the issued warrants by half by raising new Tier 1 equity prior to the end of 2009.
- Executive Compensation/Transparency - Same as other QFIs.
- Related Party Transactions - Same as Non-Public MHC QFIs.