Wisconsin Bank Seeks Novel Rescue in Bankruptcy Court

Anchor BanCorp Wisconsin (ABCW) finally has a lifeline and it is determined to prevent a creditor — which is also a competitor — from holding up its rescue.

On Tuesday the $2.4 billion-asset company announced it has $175 million of capital committed from private and institutional investors, and it plans to get it in the door by filing for Chapter 11 in the U.S. Bankruptcy Court for the Western District of Wisconsin.

The Madison company has been on the hunt for capital for years and had been working on this particular deal for months. But it hit a snag when Associated Banc-Corp (ASBC), one of the holders of an $183 million line of credit for Anchor, refused to consent to the recapitalization plan, according to court documents.

The $24 billion-asset Associated in Green Bay, also voted against the pre-packaged bankruptcy plan. But in bankruptcy, the majority rules: U.S. Bancorp (USB) and Bank of America (BAC), which together hold an 84% stake in the line of credit, are backing the deal. So is the Treasury Department.

"We've worked on a number of transactions in the last four years, and this is the first one we've been able to get to this stage," says Chief Executive Chris Bauer, who was hired in 2009 to save Anchor. "The bankruptcy allows the majority of those who signed off on the plan to prevail."

The plan calls for the Treasury to receive a 3.3% common stake in Anchor instead of seeking repayment of the company's $138 million in Troubled Asset Relief program aid and accrued dividends.

The bank lenders are set to receive a $49 million cash payment to extinguish the debt, which has had its maturity date deferred for years. In July, Anchor went into default on the loan after the Federal Reserve Board rejected a request to extend the due date again. Anchor said in its bankruptcy filing that the rejection was an additional reason it is pursuing its recapitalization through the bankruptcy court.

It is unclear why Associated opposes the deal.

Bauer declined to comment on Associated specifically, and a spokeswoman for Associated said the company does not comment on individual customers or ongoing legal issues.

Speculation from industry experts varied from the obvious — Associated executives perhaps thought the settlement value was too low — to the strategic — maybe the acquisition-hungry company was vying for a way to turn its line of credit into an in-market deal.

Whatever its motivation, attorneys say the bankruptcy court is the way to force it to allow the recapitalization to happen.

"A bankruptcy plan binds a class of creditors if 51% in number and two-thirds in value vote to accept the plan, so 84% should be enough," says Mark Fisher, a bankruptcy attorney at Schiff Hardin in Chicago who is not involved in the deal. "The bankruptcy code allows you to jam the remaining creditors whose consent you don't have."

Bankruptcy has emerged as a solution to help recovering banks untie themselves from their underwater holding companies. However, Anchor's transaction is decidedly different.

The majority of the bankruptcy cases have resulted in the bank units being auctioned off to new owners in what is known as a 363 sale, referring to the section of the bankruptcy code that allows for such auctions of assets. Additionally, most of the bankruptcies have involved trust-preferred securities, capital instruments that haven proven difficult to resolve without that help of the bankruptcy process.

Equally noteworthy is Anchor's ability to enter into the bankruptcy proceedings with its new equity partners. Companies like Capitol Bancorp (CBCRQ) have attempted similar restructurings but had to change course when the additional capital didn't materialize.

"We raised the money in advance, and that is unique in the bank holding company bankruptcy space and unique in Chapter 11 generally," says Van C. Durrer 2nd, a partner at Skadden, Arps, Slate, Meagher & Flom. Durrer is representing Anchor in the bankruptcy reorganization and says it is rare to have the private placements in hand before the bankruptcy filing. "It speaks to the exceptional amount of confidence investors had in this team."

Others say the Anchor deal might open up another avenue for bankruptcy restructurings and meshes well with the types of transactions some investors are eyeing.

"This does bode well for others," says Ernest Panasci, a partner at Stinson Morrison Hecker in Denver. "My estimation is that the investor community is now looking for the sick holding companies that want to restructure and end up with a solid bank. It is good to see them resolving themselves this way."

Anchor didn't name its new equity partners, who will collectively own 96.7% of the reorganized company; none will own more than 9.9%.

However, Bauer says some of them have long shown an interest in the company and others are newcomers who are comfortable with its improvement. Under Bauer's direction, Anchor has cuts its assets nearly in half to keep its AnchorBank thrift unit's capital levels above the threshold where it would have been in danger of failing. At June 30, the thrift was considered adequately capitalized.

"Four years of hard work by the team here has given investors enough transparency in the company and its future," Bauer says. "We have a lot of different stakeholders — some of them have stuck with us and we are pleased that they did, and some were newer to us in the last six months."