On April 13, 2009, the Treasury Department published the standard agreements for Subchapter S institutions to participate in the TARP Capital Purchase Program. As previously discussed, the TARP Capital Purchase Program for Sub S institutions consists of a subordinated debt instrument paying interest at a rate of 7.7% per annum until the fifth anniversary, and then at 13.8% per annum, plus an immediately exercised warrant for additional subordinated debt equal to 5% of the investment, paying interest at a rate of 13.8% per annum. The investment has a 30 year term, and, like trust preferred securities, interest can be deferred for up to 20 consecutive quarterly periods.
Like the documents for public and private participants, the standard documents consist primarily of a letter agreement that incorporates the standard terms contained in a securities purchase agreement, as well as documents defining the investment instruments.
For some reason, the Securities Purchase Agreement defines the subordinated debt instrument to be the “Senior Notes,” presumably to be comparable to the “Senior Preferred” issued under the TARP Capital Purchase Program for public and private institutions. However, these “Senior Notes” are subordinated to virtually all other indebtedness, whether outstanding at the time of the investment or subsequently incurred. The TARP subordinated debt instruments are senior to any subordinated debt issued in connection with trust preferred securities.
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On December 23, 2008, the Treasury “upgraded” the Securities Purchase Agreement for publicly traded companies under the TARP Capital program. The Securities Purchase Agreement on the Treasury’s website is now identified as version 12 rather than version 11 in the footer of the document.
The Treasury added Sections 4.11 (Bank and Thrift Holding Company Status) and 4.12 (Predominantly Financial) to the Securities Purchase Agreement for publicly traded companies. The private company documents already contained these provisions, so the modifications merely conform the terms for private and public participants. The new provisions add two ongoing obligations for TARP Capital recipients: (a) retaining bank holding company or savings and loan holding company status while the Treasury owns any investments; and (b) remaining predominantly engaged in financial activities. For traditional community banks, we do not foresee any issues in complying with the provisions of 4.11 and 4.12.
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The public company Securities Purchase Agreement (the “Agreement”) provides the standard terms for the TARP Capital investment for public companies. We address some of the most important sections of the Agreement, especially those that we believe are of particular interest to community banks or that significantly clarify the term sheet.
Recitals
The recitals to the Agreement contain two provisions that not only highlight the intent of the TARP Capital Program but also make clear what the Treasury expects from a company that receives TARP Capital.
WHEREAS, the Company agrees to expand the flow of credit to U.S. consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy;
WHEREAS, the Company agrees to work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market;
The recitals do not form binding obligations on participating companies, and these provisions are not repeated in the binding terms contained later in the Agreement. Moreover, subsequent guidance from the Treasury and the federal banking regulators makes clear that all banks are expected to undertake these actions, not just those that receive TARP Capital.
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