The Treasury announced its policy for the disposition of warrants received in connection with investments made under the Capital Purchase Program (“CPP”). For a further discussion of the CPP, please see the October 14, 2008, October 21, 2008 and October 27, 2008 Alerts. Under the CPP, the Treasury received warrants in the institutions receiving funds. In the case of investments in publicly-traded institutions, the Treasury received warrants to purchase common shares (“CPP Warrants”); these CPP Warrants have not been exercised. In the case of institutions that are not publicly-traded, Treasury received warrants to purchase preferred stock or debt; these warrants are no longer outstanding because they were exercised immediately upon closing the initial investment.
When a publicly-traded institution repays the Treasury’s CPP investment, the original contract under the CPP provides the institution with a right to repurchase the CPP Warrants at fair market value via an independent valuation process.
The Treasury announced the following process for repurchases of CPP Warrants:
Step 1: Within 15 days of repayment, an institution wishing to repurchase CPP Warrants should submit a determination of the fair market value of its CPP Warrants to the Treasury.
Step 2: The Treasury will then have 10 days to determine whether or not to accept the institution’s initial determination.
Step 3: If the Treasury objects to the institution’s determination and cannot reach agreement with the bank regarding fair market value of the CPP Warrants, the institution and the Treasury will each select an independent appraiser. These independent appraisers will conduct their own valuations and attempt to agree upon the fair market value of the CPP Warrants.
Step 4: If these appraisers fail to agree, a third appraiser will be hired, and subject to certain limitations, a composite valuation of the three appraisals is used to establish the fair market value of the CPP Warrants.
The Treasury stated that it will base its determination of the value of the CPP Warrants on three categories of input: (1) market prices, (2) financial modeling and (3) outside consultants and financial agents. If an institution chooses not to repurchase the CPP Warrants according to its existing contractual rights, the Treasury has the discretion to dispose of the CPP Warrants as it sees fit over time. In these instances, the Treasury states that it will sell the CPP Warrants through an auction process over the next few months. The Treasury indicated that it is currently establishing guidelines for these auctions. The Treasury further stated that it will begin publishing additional information on each warrant that is repurchased, including the institution’s initial and subsequent determinations of fair market value, if applicable. Following the completion of each repurchase, the Treasury will also publish the independent valuation inputs used to assess the institution’s determination of fair market value.