In April, the U.S. Treasury completed its sixteenth round of individual auctions of TARP CPP securities. By my calculations, Treasury has now completed auctions of its investments in 126 financial institutions, with auction sales totaling approximately $2.4 billion at an aggregate discount of approximately 15%.
The 126 institutions originally represented $2.75 billion in investments in U.S. depository institutions, ranging from investments as small as $430,000 to as large as $267 million. When you combine the dividends that have been paid to the U.S. Treasury by these institutions, the Treasury has received a gross profit of approximately $110 million. The fact that Treasury has recovered, in the aggregate, a profit on these investments is fairly remarkable, considering that 27 of the auctioned institutions had each missed four or more quarterly dividend payments.
As shown in the chart below (click on the chart for a larger version), the volatility of the discounts has increased significantly in the later auction rounds.
One item to keep in mind when looking at auctions results is the amount, if any, of outstanding unpaid dividends or interest. While the intitial TARP CPP auctions included institutions that were current in their payment of dividends/interest (and purchasers were obligated to pay Treasury 100% of any accrued but unpaid dividends/interest at the time of purchase), subsequent auctions have included 27 institutions in which the institution has missed at least four quarterly dividend or interest payments. In these instances, Treasury has not required the purchaser to pay to Treasury any amount for these unpaid dividends and interest payments, and purchasers will be entitled to retain any payments subsequently made. Accordingly, in measuring the discount on these auctions, it is important to factor the unpaid dividends into the equation, either by adding the unpaid dividends/interest to the denominator (reflecting additional amounts owed to the holder) or subtracting the unpaid dividends from the numerator (assuming repayment in full of any unpaid dividends/interest). Although Treasury has frequently insisted on 100% payment of unpaid dividends in the restructuring context, we believe adding the amount of unpaid dividends to the numerator more appropriately measures the potential returns to purchasers.
(We also note that the Treasury, as well as press, frequently gives equal weight to the auctions of the “warrant” preferred or debentures. These “warrant” instruments were the initial 5% kicker provided to Treasury at no additional cost in connection with the TARP CPP investments (in lieu of warrants to purchase common stock of the institution). These “warrant” instruments have paid the higher dividend/interest rate since issuance, and thus reasonably command a small premium vis-a-vis the primary investment vehicle. However, they also represent only a small portion of the overall portfolio, and make tracking more difficult. For our purposes, we have included the proceeds received by Treasury in the auction of these “warrant” instruments in our aggregate calculations (so that any return on the “warrant” instruments reduces the discount Treasury experienced from its original investment), but otherwise excluded.)
The auctions have included fourteen Subchapter S institutions, who received TARP CPP investments in the form of subordinated debt. The Treasury has recognized a discount of between 1.5% and 40% on these investments. For those that were current in their interest payments at the time of the auction, the discounts were between 1.5% and 27%. For the give institutions in deferral, the discounts ranged from 7.5% to 40%. (Ten of the fourteen received discounts between 1.5% and 10%.)
The auctions have also included fourteen institutions without a holding company, and thus where the TARP CPP investment took the form of non-cumulative preferred stock. All but one of these institutions was current on their dividend payments at the time of the auction, and discounts have ranged from 1.9% to 35%. (Eight of the fourteen received discounts between 10% and 18%.)
As previously mentioned, 27 institutions were in deferral at the time of their auction. Based solely on par/principal amount outstanding, the auctions ranged from a premium of 10% to a discount of 82%. However, if you include unpaid dividends in the denominator, the auctions for these 27 institutions created discounts ranging from 5% to 85%. Eleven of the institutions in deferral (ranging from 4 to 13 missed quarters) received discounts of less than 20%, while five institutions in deferral (ranging from 9 to 14 missed quarters) received discounts in excess of 50%.