Banks Are Sold on Warrant Auctions; Treasury's Pricing on Direct Repurchases Dissuades More Firms

By Monks, Matthew | American Banker, February 19, 2010 | Go to article overview
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Banks Are Sold on Warrant Auctions; Treasury's Pricing on Direct Repurchases Dissuades More Firms

Monks, Matthew, American Banker

Byline: Matthew Monks

The Treasury Department said Thursday it will auction off warrants it took in four major banking companies as part of the industry bailout. They probably will not be the last warrants to go on the auction block.

Under the Troubled Asset Relief Program, the Treasury took warrants in more than 280 companies that got federal aid. The warrants give the holder the right to buy common shares of the company at a fixed price for up to 10 years from their date of issuance. Once a bank repays Tarp, it has two weeks to decide whether to buy back its warrants directly or let the Treasury auction them off.

Complying with the banking companies' wishes, the Treasury said it will sell during the next month its warrants in Bank of America Corp., Washington Federal Inc., Texas Capital Bancshares and Signature Bank, obtained through Tarp's Capital Purchase Program.

Observers said they expect PNC Financial Services Group Inc., Wells Fargo & Co., Valley National Bancorp and other companies that have recently returned their Tarp money to follow suit. If the companies bid on their own warrants at auction, they may end up paying less than if they bought them directly from the government, market watchers said. Also, auctions give lenders looking to preserve capital right now the option to buy their warrants at a later date in the secondary market.

"I don't have any confidence that the Treasury is able to price these warrants" at levels banks would find enticing, said Gary Townsend, the chief executive of Hill-Townsend Capital LLC. "I think that they'll all end up sold to market because of capital constraints. [Banks] have the ability to, later on, effectively buy back these shares through capital management."

So far, most lenders that repaid their Tarp funds have repurchased their warrants directly from the government. Market watchers said this was bound to change after sales in December of warrants in JPMorgan Chase & Co., Capital One Financial Corp. and TCF Financial Corp. established a market value for these securities.

The decision to buy from the government, or not, comes down to a number of factors, including how much capital a lender has, how comfortable it feels about diluting its stock and, of course, the price.

The warrants that have been auctioned have fetched surprisingly low prices, though the Treasury has said it is satisfied with the results. Nobody knew for sure how much the warrants would command at auction; the only security comparable to 10-year warrants is long-dated stock options. Investors priced warrants at a discount to stock options, given their need to book a return while assuming the risk of these securities.

JPMorgan Chase's warrants were auctioned at $10.75 apiece on Dec. 10 and by month's end were trading at well over $13, suggesting they were sold at a discount. The Capital One and TCF Financial warrants have also fetched higher prices in secondary trading.

"The values that the Treasury got in these auctions were less than what we had expected," said Espen Robak, president of Pluris Valuation Advisors LLC, an options valuation firm. "According to our modeling, at least, Treasury did seem to get better prices when they did negotiate directly with the banks, with a few exceptions.

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Banks Are Sold on Warrant Auctions; Treasury's Pricing on Direct Repurchases Dissuades More Firms


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