US Treasury's Moves Bolster Popular's Conversion Effort
August 19 2009 - 4:06PM
Dow Jones News
The U.S. Treasury Department's support of Popular Inc.'s (BPOP)
quest to beef up its capital signals the government's interest in
maintaining a strong lender in the troubled Puerto Rican
economy.
Popular wants to add $1.1 billion to common equity in case the
financial crisis gets more dire. But its attempt to beef up equity
by converting privately held preferred stock and trust preferred
securities into common stock initially failed to gain enough
traction among trust preferred shareholders.
Last week, Popular announced that the Treasury Department would
convert $935 million of Popular preferred stock it received through
the Troubled Asset Relief Program, or TARP, into trust preferred
securities.
The Treasury's decision to convert the preferred stock into
trust preferreds gives little economic incentive to private trust
preferred holders to convert to common stock, but the government is
adding a psychological carrot: It appears to be assuring investors
that the government has Popular's back, so to speak, encouraging
investors to convert to common stock, several analysts said.
Popular, headquartered in San Juan, has been struggling with the
island's four-year recession, and with the aftermath of its
expansion into the mainland's banking and subprime-loan
markets.
But Popular is Puerto Rico's biggest bank by assets and
deposits. Popular is perhaps the most important bank on the island
for the U.S. government to help maintain sufficient capital to
weather the crisis.
Ten banks operate in Puerto Rico, and in 2005 many were burned
when complicated mortgage derivatives deals turned out to be
financially and legally flawed. Puerto Rico turned out to be the
canary in the mortgage coal mine.
Popular was one of the few Puerto Rican banks that avoided this
vanguard to the financial meltdown three years later. Popular
Chairman and Chief Executive Richard Carrion is a director of the
Federal Reserve Bank of New York and an executive board member of
the International Olympic Committee.
Given Puerto Rico's precarious economic condition, and the
damage many smaller banks have sustained there, government support
for Popular stabilizes the island and avoids having "four million
[Puerto Ricans] leave for Miami," said Bain Slack, an analyst with
Keefe, Bruyette & Woods Inc.
On Wednesday, Slack upgraded Popular's stock to outperform from
market perform. In his research report, he wrote, "Popular is using
one of the few options it has left" to improve capital.
Popular, meanwhile, on Wednesday set the conversion prices of
its common stock at $2.50. Popular's stock was recently ahead 3.4%,
to $1.82. On Tuesday, the stock had jumped more than 31%.
The Treasury's conversion results in a $500 million accounting
gain that is added to capital. Popular will avoid the embarrassment
of suspending the dividend on government-owned securities - or
converting them into common stock, as Citigroup Inc. (C) is
doing.
Analysts and lawyers said this is only the second time that the
Treasury agreed to convert its preferred stock; the first was Citi,
where the government is converting its preferred into common
stock.
Popular twice extended the conversion deadline - originally set
for July 24, now August 20 - and sweetened terms of the conversion
for private holders. It had already cut the dividend for preferred
stock, and said it is "highly probable" that it would suspend
dividends for the trust preferreds "for a number of years."
However, "As long as the TARP preferred stock remained
outstanding, holders of trust preferred securities were likely to
continue to receive their dividends," Joe Gladue, an analyst with
B. Riley & Co. LLC, wrote in a research report. "This apparent
assurance made them less likely to participate in the exchange
offer."
-By Matthias Rieker, Dow Jones Newswires; 212-416-2471;
matthias.rieker@dowjones.com