The Treasury Department's TARP Capital Purchase Program ("CPP") provides for the Treasury's purchase of up to $250 billion of senior preferred shares in U.S. depository institutions and their U.S. holding companies. Of this amount, $125 billion was committed initially to nine large institutions. On October 24 and 25, 2008, it became apparent that further purchase commitments were going to be made by the Treasury to 20 to 30 regional bank holding companies. The names and amounts committed to these institutions have not been released, and it appears that each institution will separately announce its participation in the CPP. At the end of that week, additional indications began to surface that insurance companies were seeking consideration. The Financial Services Roundtable also asked the Treasury Department to expand the CPP to include securities broker-dealers, insurance companies, automakers, and foreign-controlled firms.
What remains unclear is the effect of these developments on the CPP, the amount of money committed to it, and the availability of funds for other institutions, as well as how nonpublicly traded institutions can participate in the CPP, although the Treasury continues to indicate that private institutions will be able to participate. The following are clear, however:
- The deadline to apply is November 14, 2008.
- All federal bank regulators encourage eligible institutions to participate.
- The Treasury intends to close all CPP purchases by December 31, 2008.
- Applications must be made at the highest-tier holding company, with copies to the federal regulator of the holding company's largest depository institution subsidiary.
Persons desiring to participate in the CPP should conclude their consideration and apply quickly.
The Treasury and the federal bank regulators have published an interagency application and related guidelines for the CPP.A copy of the application is attached to this Commentary.
The following actions are suggested:
- Consider the amount of capital you may need in the form of CPP preferred stock.
- Discuss participation in the CPP and the amount of capital sought with your primary federal and state bank regulators as soon as possible. All institutions, particularly smaller and troubled institutions, will need to have their regulators advocate their interests in order to gain visibility and enhance their chances of utilizing the CPP. The Treasury has stated that it will look to a troubled institution's primary regulator for recommendations regarding any applications submitted. While the Treasury will disclose the institutions accepted in the CPP, it will not disclose those institutions that either withdraw their application or are rejected for participation in the CPP.
- Be prepared to discuss and offer your regulators solutions to current problems, such as concentrations of assets or risks, problem loan levels, "structural issues" (i.e., private company, lack of authorized preferred and common stock, etc.), and whether you expect to raise private capital in conjunction with the CPP. It is now clear that some applications will be rejected and that applicants need to be proactive to gain approval to participate. Practical and realistic alternatives to the CPP should also be considered.
- Plans to add capital from other sources should be disclosed.
- Consider whether your certificate of incorporation authorizes "blank" preferred stock issuable in series upon only board of directors' action.
- Consider whether you have sufficient amounts of common stock authorized and available for reservation for exercise of any warrants issuable to the Treasury under the CPP.
- Consider the use of depository preferred stock to preserve authorized but unissued preferred stock, to avoid a shareholders' meeting, and to provide future flexibility.
- Consider whether a shareholders' meeting will be needed to amend the certificate of incorporation to authorize preferred stock or to authorize or issue additional shares of common stock, and, if needed, prepare the proxy material for such meeting now. The Treasury's FAQs indicate that applicants will only have 30 days after preliminary Treasury approval to submit final documents and fulfill any outstanding requirements of the CPP.
- Consider whether any amendments or waivers are needed from existing investors to permit the issuance to the Treasury of preferred stock, warrants, or the common stock issuable upon exercise of the warrants, and whether any existing instruments contain anti-dilution or price protection covenants that may be triggered by participation in the CPP.
- Private institutions, including those that have elected to be taxed as "Sub S" corporations, should apply for the CPP, even though their means of participation remain to be defined.
- Absent action by the Treasury or the IRS, Sub S companies may have to decide whether the CPP capital is more important than maintaining their Sub S election.
The TARP CPP offers capital with reasonable terms, which should build investor, depositor, customer, and public confidence in those institutions that participate. The FDIC has stated that participation in the CPP "can bolster financial strength, or potentially support acquisitions, both of which allow for prudent lending that may be currently constrained by capital levels." Whether or not capital is currently needed, capital from the CPP offers:
- Opportunities to grow profitably in disrupted markets.
- Opportunities to meet increasingly stringent credit requirements by lenders and counterparties.
- Insurance against: further deterioration in economic and credit conditions; changes in accounting rules, such as FASB 140; and increases in minimum capital and liquidity requirements imposed by the bank regulators or legislative action.
- Reductions in risk that may attract new investors.
- Individually, and in conjunction with the FDIC's Temporary Liquidity Guarantee Program, additional liquidity.
Strong consideration should be given to participating promptly in the CPP.