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Updated TARP Capital Securities Purchase Agreement

On December 23, 2008, the Treasury “upgraded” the Securities Purchase Agreement for publicly traded companies under the TARP Capital program.  The Securities Purchase Agreement on the Treasury’s website is now identified as version 12 rather than version 11 in the footer of the document.

The Treasury added Sections 4.11 (Bank and Thrift Holding Company Status) and 4.12 (Predominantly Financial) to the Securities Purchase Agreement for publicly traded companies.  The private company documents already contained these provisions, so the modifications merely conform the terms for private and public participants.  The new provisions add two  ongoing obligations for TARP Capital recipients: (a) retaining bank holding company or savings and loan holding company status while the Treasury owns any investments; and (b) remaining predominantly engaged in financial activities.  For traditional community banks, we do not foresee any issues in complying with the provisions of 4.11 and 4.12.

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Private Company TARP Warrant Calculations

The Treasury has provided us with more detailed calculations for the Warrant Preferred Shares to be issued by private companies participating in the TARP Capital program.  (As a reminder, the “warrants” for private companies are essentially warrants only in name, as the Treasury intends to exercise them immediately, causing additional shares of preferred stock, the Warrant Preferred Shares, to be outstanding immediately following the capital infusion.)

In order to calculate the number of Warrant Preferred Shares that are subject to the warrant (before net settlement), the following calculations need to be made:

  1. (Aggregate Purchase Price x 5%)/$1,000 = Number of Warrant Preferred Shares (following net settlement of the warrant).
  2. (Number of Warrant Preferred Shares x $0.01)/$1,000 = Net Settlement Amount
  3. Number of Warrant Preferred Shares + Net Settlement Amount = Number of Shares subject to Warrant.

These calculations result in the Treasury receiving the full 5% of their TARP Capital investment as Warrant Preferred Shares, and avoids any reduction as a result of the net exercise (and further emphasizes that the warrants are only warrants in name.)

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TARP Capital Investment Agreements for Private Companies

On December 11, 2008, the Treasury published the investment agreements for privately held companies that are approved to receive TARP Capital infusions.

The Treasury has used the same basic structure as adopted for publicly traded companies: a uniform securities purchase agreement, form of warrant and certificate of designations for preferred stock, along with a personalized letter agreement providing the details for each particular investment.

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Analysis of Public Company Securities Purchase Agreement

The public company Securities Purchase Agreement (the “Agreement”) provides the standard terms for the TARP Capital investment for public companies.  We address some of the most important sections of the Agreement, especially those that we believe are of particular interest to community banks or that significantly clarify the term sheet.


The recitals to the Agreement contain two provisions that not only highlight the intent of the TARP Capital Program but also make clear what the Treasury expects from a company that receives TARP Capital.

WHEREAS, the Company agrees to expand the flow of credit to U.S. consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy;

WHEREAS, the Company agrees to work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market;

The recitals do not form binding obligations on participating companies, and these provisions are not repeated in the binding terms contained later in the Agreement.  Moreover, subsequent guidance from the Treasury and the federal banking regulators makes clear that all banks are expected to undertake these actions, not just those that receive TARP Capital.

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Treasury Department Provides Updated Information

On October 31, 2008, the Treasury Department issued a press release with updated information about the TARP Capital program.  Specifically, the Treasury Department provided additional documents for publicly traded financial institutions applying for TARP Capital.  These documents include:

More analysis to follow this weekend, but we did want to highlight two points of information.

1.  Update for Privately Held Banks. The Treasury’s press release specifically states that the Treasury will post an application form and term sheet for privately held eligible institutions at a later date and establish a reasonable deadline for private institutions to apply.

2.  Redemption Right on Warrants. The Securities Purchase Agreement gives the right (Section 4.9) for the Company to repurchase the warrants (or the common stock underlying the warrants) from the Government at their then current market value once the Government no longer holds the preferred stock.  This provides participating institutions with the ability to know that the Government’s investment, and the resulting limitations on executive compensation, can be terminated by the participant no later than 3 years after the initial investment (assuming sufficient capital to support the redemption of the preferred and warrants).

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Where Can I Find the Investment Agreements?

As you may know, the TARP Capital Application (Word Version) asks whether the “Institution Has Reviewed The Investment Agreements And Related Documentation On Treasury’s Website (Yes/No).”

The Investment Agreements and Related Documents have not yet been made available by the Treasury Department.  When they are made available, we presume they will be made available on the Treasury’s Emergency Economic Stabilization Act page.

Until they are made available, we recommend that applying institutions indicate that they have not read the materials (either with or without a note that the materials were not available at the time of filing).  Due to the FDIC’s guidance to note any structural conditions to acceptance of the Treasury’s public term sheet, we also recommend that applicants refer to our earlier articles describing potential issues for non-public financial institutions.

Update 10/29/08: We understand that the FDIC is now informing applicants that the investment agreement will not be provided to them until they are approved for participation in the TARP Capital program.

Update 10/31/08: The Investment Agreements for publicly traded companies are now available.  Private and Subchapter S institutions may wish to review generally, but the Treasury is working on revised Investment Agreements for non-publicly traded companies.

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