Everyone has heard of the government bailout of the U.S. banking system, but it looks like the investing public may provide round two of the bailout, as the number of banks raising capital in secondary offerings continues to grow. This capital will come in handy during the balance of the credit cycle.
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Late in 2008, the federal government created the Troubled Asset Relief Plan (TARP) to assist the U.S. banking system. One part of the TARP was the Capital Purchase Program (CPP), which consisted of preferred stock investments by the government into hundreds of banks. Some companies even reorganized to be eligible for these investments. Both Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) restructured to become bank holding companies.
Dealing with TARP
Almost one year later, some banks have redeemed the preferred stock held by the U.S. Treasury, while others still labor under the restrictions imposed in return for the investment. These include limitations on pay for top executives and dividend policy.
Many banks are raising additional capital to reinforce balance sheets through equity offerings to the public. The capital is needed due to credit losses that are still continuing despite the prospect of economic growth restarting in 2010.
Huntington Bancshares (Nasdaq:HBAN) recently announced a $350 million offering of stock. The bank actually raised $400 million in the offering after pricing the deal. The capital raise had the desired impact, and after accounting for this deal and a previous one, the bank now has a pro forma tangible common equity to tangible asset ratio of 6.57%, up from 5.69% at the end of the second quarter of 2009.
Synovus Financial Corp. (NYSE:SNV) raised $600 million in equity, up from the original amount of $350 million. The market didn't like it, however, as the offering will boost the share count by more than 50%, diluting the current stockholders.
Zions Bancorp (Nasdaq:ZION) announced a double offering of $250 million in stock and $450 million of five-year notes at a 7.75% coupon. The size of the note offering was increased above the original amount.
The common denominator of all these offerings is strong investor interest, as two of the deals increased in size. Zions Bancorp is not doing a traditional offering of stock at one time, but is commencing an equity distribution, where its has an open-end commitment to sell stock up to the $250 million level. It might be some time before the offering's success can be determined, but if the pattern holds, the bank will have abundant interest from investors.
The Bottom Line
The rash of bank equity offerings has stirred the interest of investors, and means another large capital injection into the U.S. banking system. This will be needed to absorb the continuing credit losses that are sure to come. (To learn more, see The Industry Handbook: The Banking Industry.)
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