Stressed Capital Markets -- Fresh Medicine Coming Your Way
The first dose of the
Treasury’s economic medicine, the Capital Purchase Program
(CPP), was roundly criticized as ineffective, undercapitalized itself,
and poorly targeted. Now the Obama administration is stepping up to the
plate with a two part program styled the Capital Assistance Program
(CAP). Its major terms, just released by the Treasury, include:
- The “stress
test” will subject the largest 19 banks (with risk-weighted
assets over $100 billion) to a “forward looking”
assessment that will focus on a bank’s firm-wide potential
losses over the next two years (including off-balance sheet obligations
and contingent liabilities). The assessment results will not be
released and must be completed by the end of April.
- Any bank that fails
the test will have six months to raise private capital or the
government will invest in the bank through the CAP. The government
injection will not be explicitly limited and will come in the form of
preferred stock that is convertible into common equity at a ten percent
discount to the market price on February 9, 2009. The shares will
mandatorily convert after seven years.
CAP money will come with a litany of strings attached such as
executive compensation provisions, disclosure around the use of
government funds and limits on dividends and acquisitions.
Governance Standards: Majority Voting Amendments
With many shareholders seeking greater control over their companies,
there is a push to modify voting standards. The vehicle of
choice for many is a bylaw amendment designed to facilitate different
voting standards. Motorcycle icon Harley Davidson’s recent
bylaw amendment implemented a form of majority voting. In
particular, “The Hog” asked for the resignation of
any director who receives more “withheld” votes
than “for” votes – a form of a plurality
vote. This is part of a broader trend as majority voting is
a hot-button issue with many activist shareholders, and companies are
consistently being asked to implement the practice as
standard. Similarly, clothing retailer Chico's is asking
shareholders to approve a majority voting standard following a review
of its “governance standards.” The
company considers abstentions and broker
“non-votes” as neither a vote for nor against a
nominee.
Restricted Stock Units: The Non-Option Option
Companies looking to fairly compensate executives for a job well-done
can be well served by restricted stock rather than warrants or stock
options. While options or warrants may ultimately become
worthless due to expiration or moves “out of the
money,” restricted shares always retain some value.
Chip maker I2 Technologies and genetics researcher Lexicon Pharma
recently adopted restricted stock plans as part of their bonus
compensation structures. I2 suggests the plan will aid in the retention
of personnel. Lexicon chose stock over cash bonuses
due to “current economic conditions….and to
conserve [our] cash and investment resources.”
Restructuring Capital Structures: Intercreditor Agreements
In attempt to better manage or even restructure their debt, companies
are turning to intercreditor agreements as a tool. These
agreements prioritize payment structures, often clarifying the right
for the more senior lenders to receive payment before junior
lenders. Retail chain Rite Aid and resource miner Gastar
Exploration are both experiencing tough times. Rite
Aid’s agreement implements a second priority, accounts
receivable securitization term loan. Gastar
prioritizes Amegy Bank as its first priority agent and Wells Fargo as
second priority agent
Hostile Back and Forth: Tag, You’re It
Hostile transactions are all around…and the pharma-industry
is feeling the brunt of the onslaught. So, how much more
hostile can the battle between Netherland-based pharma Orthofix and
activist investor group Ramius LLC become? In a
passionate letter sent to Ramius, Orthofix’s largest
shareholder (who is also the board’s chairman) naturally
discouraged the hedge fund from continuing its move to replace a
minority slate of Orthofix’s board. The letter goes
on to present a strong case for the chairman’s continued role
– citing his “two decades” of service,
and convincingly presents his rationale behind keeping
Orthofix’s recently acquired subsidiary, Blackstone Medical.
Shuffling Executives and Board Repositioning
Company cutbacks and executive repositionings are occurring at a breakneck
pace. In conjunction with a separation and
consulting agreement, drug maker Anesiva, Inc. eliminated its Chief
Financial Officer and added a board member. This new person
was appointed to serve as a “financial expert” in
what may be a cost-cutting maneuver in disguise. Like
Anesiva, metal company NCI Building Systems entered into a separation
and consulting agreement with a director who retired late last
year. The ex-employee will serve the company as a consultant,
be paid a salary, and is eligible for healthcare.
Published: February 26, 2009
