Six months after launching its Capital Purchase Program, the U.S. Department of the Treasury has released a term sheet addressing participation by mutual institutions. Mutual institutions are the final category of institutions eligible to participate in the program. The deadline for mutual institutions to apply under the just released term sheet is May 14, 2009. Institutions that have previously applied to participate in the program do not need to reapply.
The security to be issued by participating mutuals will be subordinated debentures with a maturity of 30 years. The debentures will pay cumulative interest at a rate of 7.7% per annum for the first five years (which equates to 5% on an after-tax basis using a 35% tax rate) and will reset to a rate of 13.8% per annum after year five (which equates to 9% on an after-tax basis using a 35% tax rate).
The debentures will qualify for Tier 2 capital treatment. The debentures rank senior to mutual capital certificates and other capital instruments and subordinate to senior indebtedness, unless such debt obligations are explicitly made pari passu or subordinated to the debentures.
Other terms include:
- Redemptions will be at 100% of the issue price, plus any accrued and unpaid interest. All redemptions will be subject to approval of the institution’s appropriate federal banking regulator.
- The debentures will be non-voting, other than class voting rights on matters that could adversely affect the debentures and the right to elect two directors if interest is not paid in full for six interest periods.
- Treasury may transfer the debentures to a third party at any time, unless the transfer of the debentures would require the institution to file periodic reports with the SEC. However, if the institution otherwise becomes a public reporting institution, it must file a shelf registration covering the debentures, provided the institution is eligible to use Form S-3.
Participating mutual institutions will provide Treasury with a warrant to purchase additional debentures equal to 5% of the investment amount. The exercise price will be $0.01 per note representing a warrant security. According to the term sheet, Treasury intends to exercise the warrant immediately. The debentures issued upon the exercise of the warrant will be identical to the debentures purchased at full price except that the warrant debentures will pay interest at a rate of 13.8% from inception and may not be redeemed until all the debentures purchased at full price have been redeemed. If the participating institution completes one or more qualifying equity offerings (meaning the sale of economic instruments or securities qualifying as capital of at least equivalent rank as the debentures) before December 31, 2009 that raise gross proceeds equal to or more than the aggregate purchase price of the debentures, the number of warrant debentures will be reduced by 50%.
Dividend and Repurchase Restrictions
Mutual institutions that participate in the program will be subject to restrictions on dividends. For as long as any debentures are outstanding, no dividends may be paid on any shares of equity, mutual capital certificates, or other capital instruments unless all accrued and unpaid interest is fully paid. Treasury’s consent will be required for any increase in regularly paid dividends for the first three years. After the third anniversary of the investment date and before the tenth anniversary, Treasury approval is required for any extraordinary dividends on deposit accounts or to increase aggregate dividends on capital instruments more than 3% over the prior year. The dividend restrictions will cease to apply after the subordinated debentures and the warrant debentures have been redeemed in whole or Treasury has transferred the debentures to third parties.
Treasury’s consent will be required for any repurchases of equity securities, mutual capital certificates, or other capital instruments until the tenth anniversary of the investment date, other than repurchases in connection with any benefit plan in the ordinary course of business consistent with past practice or relevant income tax laws, unless before that time the debentures and warrant debentures have been redeemed in whole or Treasury has transferred the debentures to third parties. After the tenth anniversary of the investment date, the participating institution cannot pay any dividends or repurchase any equity securities, capital certificates, or other capital instruments until all debentures and warrant debentures held by Treasury have been redeemed.
All mutual institutions that participate in the program must agree to comply with the rules, regulations and guidance of the Treasury Department for executive compensation, transparency, accountability and monitoring.
For as long as Treasury holds the debentures, the mutual institution and its subsidiaries may not enter into a transaction with a related person (as defined in SEC regulations) unless such transaction is (i) on terms no less favorable to the institution than could be obtained from an unaffiliated third party and (ii) has been approved by the audit committee or comparable body of independent directors.