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The company's post-BankAtlantic strategy became clearer this week. It is buying a Florida company that serves the vacation and retirement crowd.
November 15 -
The deal between Sterling Financial and First Independent, both of Washington state, relies on a complex carve-out from a bank holding company. Creative maneuvers are needed these days, but this model isn't for everyone.
November 7 -
Though bank trust-preferred CDOs are still a disaster for their original investors, they now garner better prices and are easier to dispose of than they were a year ago.
December 29
The problem with complex plans — in bank M&A or elsewhere — is that life can make them more complicated.
BankAtlantic Bancorp Inc.'s two-year spat with its biggest creditor took another ugly turn when a New York hedge fund sued to block the sale of most of BankAtlantic's banking operations to BB&T Corp.
Hildene Capital Management Inc. and other bondholders object to being left holding a stake in the parent company and its $600 million of business mortgages and consumer loans that BB&T is not buying.
Hildene says it lent $237 million to a bank that gathers deposits and makes loans, not a "rag-tag group of assets," according to a lawsuit filed Monday in the Court of the Chancery in Delaware. The deal would let BB&T "unlawfully cherry-pick" what Hildene says is BankAtlantic's "only operating asset," a 78-branch retail bank and $2.1 billion of its "highest-quality" loans, the suit says.
Carve-out arrangements like the one between BB&T and BankAtlantic have become more popular lately as buyers and sellers try to cope with volatile economic conditions. Yet the deal is especially complicated because a public company wants to spin out its bank and surrender its status as a bank holding company. Other recent carve-out deals have involved privately held targets. The Hildene suit serves as a reminder that carve-outs and other complex structures are not a solution for everybody.
Hildene and other corporate bond investors have been causing regional banks headaches for years. Hildene owns a big chunk of BankAtlantic's roughly $320 million in outstanding trust preferred shares, a form of bank debt that became popular with banks and alternative investors after the economy crashed.
The crux of Hildene's argument is that the transaction violates a "crystal-clear" clause in its loan agreement with the $3.7 billion-asset BankAtlantic that states that if it wants to sell all or most of its assets, the buyer has to assume its debt.
The nature of the securities and the people that bought them has created a lot of legal drama.
Part of the problem is the instruments are a weird hybrid of debt and equity. The way they work is that a bank sets up a trust subsidiary that sells shares in itself and uses the proceeds to buy debt from its parent company, the bank. Trust preferreds used to be considered Tier 1 equity. What this meant is that banks that traditionally dealt with friendly equity investors now had scrappy fixed income guys high up in their capital structures adept at fighting for control of troubled firms.
SunTrust Banks Inc. and Regions Financial Corp. among others have been subject to failed lawsuits from trust preferred investors upset by mounting loan losses. Numerous community banking mergers have been scuttled by the complications that come from trying to wrangle support from trust preferred investors, many of whom can be difficult to track down because these types of shares tended to be packaged into multi-tiered bonds.
The bad blood between BankAtlantic and Hildene goes back to at least early 2010, when Hildene squashed BankAtlantic's plan to buy back most of its trust preferreds for 20 cents on the dollar.
Hildene suggested BankAtlantic cut executive salaries and sell assets instead. The gist of the suit is that the deal with BB&T is not an asset sale but a de facto whole bank sale.
The parties began publicly sparring over this transaction immediately. Hildene Chief Executive Brett Jefferson questioned its legal merit in an interview Nov. 1 with the South Florida Business Journal. BankAtlantic CEO Alan Levine countered in the same story that it would be good for bondholders by ensuring they get paid.
BankAtlantic did not return a call for comment, and Hildene declined to comment.
The rights of Hildene and other trust preferred holders is not entirely straightforward because BankAtlantic has issued 13 different tranches of junior debt to the trusts it set up to issue preferred shares from 2002 to 2007. The covenants on all of those different deals could vary.
The wording of at least one of them, however, reinforces Hildene's argument. Filings with the Securities and Exchange Commission that detail a $2 million public offering for BBC Capital Trust II in late 2001 states that BankAtlantic may not "merge into" or "transfer" or "lease" substantially all of its properties and assets to any person" unless that entity "expressly assumes our obligations on the debt securities."
This suit could be resolved in numerous ways. The ideal situation for Hildene would be that BB&T agree to assume the trust preferred shares, which could mean restructuring its purchase agreement to make sure the finances still meet its return requirements.
Other options could include BB&T simply guaranteeing the trust preferreds, which would mean promising to pay them if BankAtlantic goes bust and cannot meet its obligations. BB&T did not return a call for comment.
