A novel approach to TARP
M&T of Buffalo, N.Y., owes $230 million in bailout money provided through the Troubled Assets Relief Program, or TARP, in December 2008, in addition to $151.5 million for TARP assistance provided to Provident Bancshares before that company was acquired by M&T in May 2009.
The U.S. Treasury on Aug. 17 completed a public offering of the $381.5 million in M&T TARP preferred shares held by the government. The preferred shares have a 5.00% coupon, which is scheduled to rise to 9.00% 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 9.00% in November 2013.
M&T on Aug. 20 made proposed an innovative amendment under which the dividend rate on all of the former TARP preferred shares will rise to 6.375% on November 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% 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 November 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.
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Written by Philip van Doorn in Jupiter, Fla.