The U.S. Treasury Department on Friday commenced a public offering of the $381.5 million in M&T TARP preferred shares held by the government. The preferred shares have a 5 percent coupon, which is scheduled to rise to 9 percent in February 2014 for the remaining $230 of the bank’s original TARP bailout, with the coupon on the $151.5 million in assistance originally provided to Provident Bancshares rising to 9 percent in November 2013.
M&T on Monday proposed an amendment under which the dividend rate on all of the former TARP preferred shares will rise to 6.375 percent on Nov. 15, 2013. The amendment needs to be approved by common shareholders, who will be sure to do so, since it will reduce the possibility of a dilutive common equity raise. The amendment also needs to be approved by the new preferred shareholders, who are likely to give the plan the nod, because 6.375 percent is a decent rate in the current environment, especially when the issuer is a strong, consistent earner like M&T.
If M&T’s preferred shareholders approve the lower rate increase, M&T won’t redeem the preferred share until Nov. 15, 2008. Otherwise, the company will probably redeem the shares in 2013, leaving the investors to pursue dividend income elsewhere. The big icing on the cake for M&T is that the former TARP preferred shares qualify as regulatory Tier 1 capital.
KBW analyst Jefferson Harralson on Tuesday said that M&T’s “ingenuity is positive,” for Synovus Financial of Columbus, Ga., “as it increases the chance of exiting TARP with a limited common raise and the chance of even having no common raise at all.”
Synovus had $26.3 billion in total assets as of June 30. The company owes $967.9 million in TARP money. The company reported second-quarter net income available to common shareholders of $46.2 million, or six cents a share, for its fourth consecutive profitable quarter.
Synovus’s Tier 1 common equity ratio was 8.78 percent as of June 30, although the company did not provide an estimate of what the ratio would be under the Federal Reserve’s rulemaking proposal in June, to implement the Basel III capital requirements and ratio calculation. The company's tangible common equity ratio was 7.12 percent.
The company had an $800 million valuation allowance for deferred tax assets (DTA) as of June 30, Synovus hopes to eventually recapture, boosting earnings and capital. Speaking at the Raymond James Bank Conference on Aug. 14, CEO Kessel Stelling said that in order to recapture the DTA, the company will need to continue its streak of profitability and credit quality improvement and show “a future or forward forecast of earnings sufficient to recapture that DTA,” according to a transcript provided by Thomson Reuters.
“For us, it’s a big event,” Stelling said, adding “we don’t minimize the effect of the DTA recovery. It’s not a cash event. It’s an accounting entry, but it’s a nice one and it represents almost $1 a share — right at $1 a share in book value for us.” Synovus still expects the DTA recapture to take place in 2013.
As far as TARP repayment goes, Stelling said that the company plans to redeem most of the preferred shares using the holding company’s cash and additional cash upstreamed from its largest banking subsidiary, and that “any shortfall, if there is one, would certainly be supplemented by, we believe, access to the capital markets whether that is debt or minimal equity raise.”
Of course, it would be a great help for the entire DTA to be recaptured before the TARP dividend raise increases to 9 percent at the end of 2013.
Harralson said that his firm has believed that Synovus “would repay its $970 million in TARP with $200 million of common equity being raised,” but that “if SNV can re-market part of its TARP, similar to MTB, this $200 million common figure could well move lower.”
While KBW “had been hoping that Treasury would auction SNV’s shares in order to release the need to raise common to repay TARP,” the firm now believes that the “re-marketing could be a better idea — Treasury gets paid back in full, and SNV can optimize its capital structure with a limited common raise, and the Tier 1 qualifying preferreds.”
M&T’s TARP preferred shares represented only 0.5 percent of risk-weighted assets, according to Harralson, while Synovus’s TARP preferred is 4.5 percent of RWA. Synovus can only count 1.5 percent of its Tier 1 common equity ratio as preferred shares, so the analyst said “re-marketing the entire $970 million seems very inefficient and would result in a total capital ratio of over 16 percent.”
So “re-marketing one-third of the TARP as Tier 1 qualifying preferred would add $320 million, or 1.5 percent of RWA to SNV’s second-quarter Tier 1 Common ratio of 8.8 percent to come to a 10.3 percent Tier 1 Ratio,” which Harralson thinks would be sufficient for the company to receive regulatory permission to repay the remainder of the TARP preferred shares.
Of course, Synovus may simply wait and see how quickly they can recapture the DTA before making any move on TARP. There may be less moving parts that way, and with much lower profitability than M&T, and lingering asset quality concerns, the dividend rate for any re-marketed preferred shares could be quite high.
Synovus’s shares closed at $2.03 Monday, returning 46 percent year-to-date, following a 45 percent decline during 2011.
The shares trade just below their reported June 30 tangible book value of $2.05, and for 13.5 times the consensus 2013 earnings estimate of 15 cents, among analysts polled by Thomson Reuters. The consensus 2012 earnings per share estimate is 10 cents.
Harralson rates Synovus “market perform,” with a price target of $2.50.
—By TheStreet.com’s Philip van Doorn
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