Feb. 14, 2013
/PRNewswire/ -- Tontine Financial Partners, L.P. ("Tontine") submitted a letter on
February 6, 2013
, to the Board of Directors of United Community Financial Corp., the parent company of The Home Savings and Loan Company of
, ("United Community Financial"), to express Tontine's concern that the
capital raising transaction announced by United Community Financial in January is unfair to its existing stockholders. Tontine, a current United Community Financial stockholder, urged the Board of Directors to restructure the transaction to reduce the total amount of capital raised, including the amount raised in a private transaction with outside investors, and to increase the portion of capital raised through the proposed rights offering to existing stockholders.
Tontine requested a response from the United Community Financial Board by
, 2013. On
February 12, 2013
, United Community Financial informed Tontine that the Board will respond after its next meeting scheduled for
, 2013. Given the timing of this response, Tontine is concerned that the Board may not be giving adequate consideration to the issues presented in Tontine's letter or the interests of United Community Financial's existing stockholders.
The full text of Tontine's
February 6, 2013
February 6, 2013
Via Facsimile and Overnight Delivery
Board of DirectorsUnited Community Financial Corp. 275 West Federal Street
Dear Members of the Board of Directors:
As you may know, Tontine Financial Partners, L.P. beneficially owns approximately 3% of the common stock of United Community Financial Corp. (UCFC). We are writing this letter to express our concerns with the
capital raising transaction announced by UCFC on
, 2013. Primarily for the reasons discussed in this letter, we believe the transaction is unfair to existing UCFC stockholders. We request that you restructure the transaction to significantly decrease the overall amount of capital being raised, as well as the size of the private placement to outside investors, and to increase the amount offered to stockholders in the rights offering.
We have a number of concerns with the capital raising transaction as currently structured:
- Total Capital Raised is Troubling. UCFC is raising an excessive amount of capital beyond what is necessary to meet the company's regulatory capital requirements and reasonable and prudent future business planning needs. Based on our review of the company's financial condition, we understand that UCFC would have needed less than $15 million in capital to increase its Tier 1 Leverage Capital Ratio comfortably above the 9.0% level by March 31, 2013 as previously required under the March 2012 consent order with its regulators, while little or no capital will be needed to reach the 8.5% Tier 1 Ratio now required by the recently announced understanding with its regulators. As such, we believe UCFC should only be raising an amount of capital to provide a reasonable cushion over the newly established target, plus the amount reasonably required to meet future capital needs as part of the prudent execution of the company's business plan.As evidenced by the company's significant reported losses, questionable lending decisions and regulatory issues during the past five years, we are not convinced that UCFC's management is prepared to manage this excess capital effectively. We fear that this capital will simply be put at unacceptable risk. In addition, as discussed further below, raising capital in excess of what is actually required in the private placement to outside investors, without approval from UCFC's existing stockholders, is unfair to existing stockholders because it unnecessarily dilutes the existing stockholders' ownership interests in UCFC.
- Total Capital Raised in Private Placement is Unfair to Existing Stockholders. Approximately $40 million of the total $47 million of capital that UCFC expects to raise in the transaction – or over 85% – is being raised through a private placement to select outside investors. These outside investors are expected to hold approximately 29% of UCFC's outstanding stock following the transaction. Only $5 million of the total capital in the transaction – or just 10% – will be offered to existing stockholders in the rights offering. This will result in significant dilution to UCFC's existing stockholders, who will end up owning, at most, 69% of the post-transaction shares, significantly altering the control of the company. We are also curious to know how it was determined which outside investors would be selectively contacted and offered the opportunity to participate in the private placement, as well as why other existing and potential investors were not contacted.We have been informed that the board decided to raise capital through a private placement because it afforded UCFC more certainty that capital would be raised prior to the previous March 31, 2013 regulatory "deadline". However, we can see no justifiable basis for raising such a significant portion of the capital in this transaction through a private placement to the detriment of the existing stockholders. As a longtime investor in community and regional bank stocks, we also believe it is unlikely that there would have been any regulatory consequences for missing the "deadline" if a plan was in place to timely raise capital.There are alternative transaction structures that provide the company and its regulators with the certainty they desire without harming existing stockholders. For example, the company could pursue a larger rights offering with existing stockholders, with the outside investors in a smaller private placement also acting as standby purchasers of any shares not acquired in the rights offering.
- Structure of Private Placement is Coercive. UCFC has structured the private placement with a mix of common stock and mandatorily convertible preferred stock, to avoid having to obtain stockholder approval of the transaction. NASDAQ rules require a NASDAQ-listed company to obtain stockholder approval of the issuance of common stock representing more than 20% of the outstanding stock of the company. Using mandatorily convertible preferred stock for a portion of the transaction allows UCFC's sales of common stock to stay below this 20% threshold. Not only has the company structured the transaction in a manner that avoids a stockholder vote, but in doing so, it has employed a coercive form of security. In a "damned if you do, damned if you don't" conundrum, stockholders will be asked to approve the conversion of the preferred stock, resulting in further dilution of the existing stockholder base. However, if the conversion is not approved and completed prior to June 30, 2013, cash dividends on the preferred stock will take effect at an annual rate of 12%, burdening the company with an annual cash flow requirement of nearly $5 million. It is surprising that the board would put its existing stockholders in this uncomfortable position, since many of them have held the stock and watched its value decline under current management's watch.
- Cost to Raise Capital is Excessive. In addition to significantly diluting existing stockholders, raising such a large portion of the capital through a private placement will result in a significant and unnecessary expense to the company. In the private placement, UCFC is expected to pay its New York-based investment bank approximately $2 million in placement fees, an expense that would not be incurred in a rights offering. Further, as noted above, to avoid stockholder approval of the issuance of common stock in the private placement, the company has structured the private placement through the use of the mandatorily convertible preferred stock. The use of the preferred stock, however, means that UCFC must seek stockholder approval of the conversion, which will result in additional cost to the company in connection with the solicitation of this vote, including costs associated with the preparation and distribution of proxy materials.
- Participation of Insiders. The ability of corporate insiders, affiliates and unnamed "consultants" to participate in the offering for over $2 million is also unfair to existing stockholders. As a result, corporate insiders are being given the opportunity to purchase amounts totaling over 40% of the amount being offered to existing stockholders in the rights offering. This will further dilute existing stockholders in order to benefit UCFC's officers, directors, affiliates and consultants, many of whom managed the company's decline over the past few years. In general, we are in favor of key leadership holding a meaningful stake in a company, particularly if they acquire their shares using their own funds. We would feel more comfortable with the executive and board portion of this $2 million if it were balanced against a larger rights offering to existing stockholders and if it were clear who was participating. Frankly, as it relates to the unnamed consultants, we are at a loss as to why they would be offered the opportunity to participate along with insiders. In addition, we would be concerned if we were to learn that UCFC had made loans to the management, board, consultants and affiliates to fund their share purchases.