Private equity drives a hard bargain in bank rescues
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Bank rescues may be both the easiest and hardest trades for private equity firms. Financial institutions are typically levered at least 10 to 1. Fresh money is almost always brought in at a discount to the current trading price, which is almost always already battered. The maths are far tilted in the favour of those stumping up capital.
But Wall Street vultures are also making a bet that they are not catching a falling knife. In the latest such deal, a group led by Fortress Investment Group and Canyon Capital this week closed a $228mn investment into the Dallas-based regional bank First Foundation. The money was good enough for a near 50 per cent stake. The shares purchased came at a near 40 per cent discount to the market price the day before (and First Foundation shares were already down about half for the year).
Earlier this year, Steven Mnuchin, the former Trump Treasury secretary, led a $1bn rescue of New York Community Bank, which itself had scooped up pieces of the troubled Signature Bank in 2023. His shares were bought at a 40 per cent discount to NYCB’s trading price and today remain deeply in the money.
Getting the timing of an intervention wrong, however, can be disastrous. The buyout group TPG Capital put $2bn into Washington Mutual early in 2008. By the end of the year it had lost the lot after WaMu went bust anyway.
First Foundation has the bulk of its loan book in California multi-family apartments, exposure it is now seeking to reduce. Similarly, NYCB had high exposure to New York City apartment buildings.
Fresh capital can give banks some breathing room in the form of a loss-absorbing cushion to sort out their balance sheets. New money, however, is less effective at countering deposit flight. But the idea is that new capital can also calm nervous depositors.
Bank executives must move quickly to raise new funds as even slightly sour sentiment can cause customers and counterparties to flee. As such, private equity firms can get attractive terms, including the ability to invest at a discount, as well as get additional equity warrants at little or no cost.
Ordinary shareholders are understandably disappointed about having their existing stakes vastly diluted and might prefer executives to drive harder bargains with private equity. Their only real alternative, however, is watching their holdings otherwise drift towards zero.
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