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U.S. Treasury Issues TARP Capital Purchase Program Term Sheet for Privately-Held Financial Institutions and Bank Holding Companies

November 18, 2008

On November 17, 2008, the U.S. Treasury ("UST") issued guidance for participation in the TARP – Capital Purchase Program ("CPP") by qualified financial institutions ("QFIs") that are not "publicly traded,"1  including (a) any privately-held top-tier bank holding company or top-tier savings and loan holding company that engages solely or predominately in activities permissible for financial holding companies, (b) any privately-held U.S. bank or U.S. savings association organized in a stock form that is not controlled by a holding company, or (c) any U.S. bank or U.S. savings association that is not publicly traded and that is controlled by a privately-held holding company that does not engage solely or predominately in activities that are permitted for financial holding companies.  Under this new guidance, "QFI" does not include any institution that is controlled by a foreign bank or company, mutual depository institutions or entities that have made elections under Subchapter S of the Internal Revenue Code of 1986, as amended ("S Corporations").  Participation in the CPP by S Corporations and mutual depository institutions still is being considered by the UST.

Application Deadline

A privately-held QFI desiring to participate in the CPP must submit an application to its primary federal bank regulator by December 8, 2008.  The UST has not yet issued the application form to be used by privately-held QFIs, but we expect that it will be substantially the same as the application form used by publicly-traded QFIs.

New Term Sheet — Similarities

This new term sheet for privately-held QFIs is similar in many respects to the term sheet for publicly-traded QFIs under the UST's previous guidance:

  • Each QFI must offer for purchase Preferred Securities ($1,000 liquidation value) representing no less than 1% and no more than 3% of its risk-weighted assets (with a maximum investment by UST of $25 billion).
  • Redemption rules, capital treatment, dividend rates, the senior status of the Preferred Securities and restrictions on issuing dividends on junior securities are generally the same as those for publicly-traded QFIs, except that, with respect to redemption, a "qualified equity offering" by the privately-held QFI does not include an offering made pursuant to agreements or arrangements entered into, or pursuant to financing plans which were publicly announced, on or prior to November 17, 2008).
  • Executive compensation restrictions also mirror those restrictions applicable to publicly-traded QFIs.

New Term Sheet — Key Differences

Key differences between this new term sheet and the term sheet for publicly-traded QFIs are as follows:

  • Dividend Restrictions.  Dividend restrictions on Preferred Securities issued by privately-held QFIs to the UST apply indefinitely in that the restrictions remain in effect until the Preferred Securities and related Warrants have been redeemed by the issuer or transferred by the UST.  The specific restrictions are as follows:
      • From the issue date to the third anniversary of the issuance — as with publicly-traded QFIs, the UST's consent is required for all dividend increases during this period;
      • From the third anniversary to the tenth anniversary of the issuance — the UST's consent is required for any increase in aggregate common dividends per share greater than 3% per annum (provided that no increase in common dividends may be made as a result of any dividend paid in common shares, any stock split or similar transaction); and
      • From and after the tenth anniversary of the issuance — the QFI may not pay common dividends or repurchase any equity securities or trust preferred securities until all equity securities held by the UST are redeemed in whole or the UST has transferred all of such equity securities to third parties.
  • Repurchase Limitations.  For ten years following the issuance of the Preferred Securities to the UST (or until the Preferred Securities and related Warrants have been redeemed by the issuer or transferred by the UST), UST consent is required before a QFI can repurchase equity securities or trust preferred securities.
  • Voting Rights.  As with Preferred Securities issued by publicly-traded QFIs, Preferred Securities issued by privately-held QFIs will have limited voting rights, and, if dividends on the Preferred Securities are not paid in full for six dividend periods (whether or not consecutive), the Preferred Securities will have the right to elect 2 directors.  However, the right to elect directors will end only when full dividends have been paid for (i) all prior dividend periods in the case of cumulative Preferred Securities or (ii) four consecutive dividend periods in the case of non-cumulative Preferred Securities.
  • Related Party Transactions.  For as long as the UST holds any equity securities of the QFI, the QFI and its subsidiaries will not enter into transactions with related persons (within the meaning of Item 404 under the SEC's Regulation S-K) unless (i) such transactions are on terms no less favorable to the QFI and its subsidiaries than could be obtained from an unaffiliated third party, and (ii) have been approved by the audit committee or comparable body of independent directors of the QFI.
  • Transferability of Preferred Securities.  The Preferred Securities issued to the UST will not be subject to any contractual transfer restrictions or restrictions of any stockholders' agreement (or similar arrangement) in effect among the QFI and its stockholders before or after the UST's investment in the QFI; provided, however, that the UST and its transferees shall not effect any transfer of the Preferred which would require the QFI to become subject to the periodic reporting requirements of Section 13 or 15(d) of the Exchange Act.  Subject to the foregoing, the QFI shall take all steps as may be reasonably requested to facilitate the transfer of the Preferred.
      • QFIs will need to examine any buy-sell or other stock restriction agreements in place to determine if the UST's position may require an amendment to those agreements.
  • Registration.  If the QFI becomes subject to Exchange Act periodic reporting requirements, then the QFI will file a shelf registration statement covering the Preferred Securities as promptly as practicable and, if necessary, shall take all action required to cause such shelf registration statement to be declared effective as soon as possible.  In addition, the UST and its transferees shall have piggyback registration rights for the Preferred Securities.
  • Warrant Terms:
      • Similar to the warrants issued to the UST by publicly-traded QFIs, warrants to be issued to the UST by privately-held QFIs will have a ten-year term and are immediately exercisable, in whole or in part.  The UST intends to exercise the warrants immediately.
      • Instead of receiving common stock under the warrants, the warrants issued by privately-held QFIs grant to the holder the right to acquire shares of preferred stock of the QFI (the "Warrant Preferred").
      • The number of shares of preferred stock that will be subject to warrants issued by a privately-held QFI will have an aggregate liquidation preference equal to 5% of amount of the UST's investment in the Preferred Securities.
      • The initial exercise price per share of Warrant Preferred will be $0.01 or the par value per share of Warrant Preferred (whichever amount is greater).
      • The Warrant Preferred will have the same rights, preferences, privileges, voting rights and other terms as the Preferred Securities originally issued to the UST, except that (1) the Warrant Preferred will pay dividends at a rate of 9% per annum and (2) the Warrant Preferred may not be redeemed until all Preferred Securities have been redeemed.
      • The warrants and the Warrant Preferred will be subject to the same transfer restrictions and registration rights as set forth above for the Preferred Securities.

New Term Sheet — Treatment of Community Development Financial Institutions

UST has the option not to require a warrant to purchase additional preferred stock for a limited class of QFIs.  If a QFI meets the following requirements, then the UST will not require the issuance of the Warrant Preferred shares: (A) the size of the investment must be $50 million or less; and (B) the QFI must be a certified Community Development Financial Institution ("CDFI").2

QFIs must file an application for certification as a CDFI by December 8, 2008.

If a QFI has applied for CDFI certification, and it is eligible for funding under the CPP program, it will receive conditional approval, which will be contingent on the QFI receiving the CDFI certification.  The CDFI certification must be approved by January 15, 2009 (and no later than the closing of the investment under the CPP).  Additional information about becoming a CDFI can be found at http://www.cdfifund.gov.  The CDFI Fund has pledged that it will streamline the certification process to 30 days in order to qualify for this exemption.


The terms and conditions of the warrants and the Warrant Preferred represent the key difference between the original term sheet for publicly-traded QFIs and the new term sheet for privately-held QFIs.  The UST will receive preferred stock under the warrants, instead of common stock, the UST intends to exercise its rights under the warrants immediately, and the Warrant Preferred has a 9% coupon in favor of the holder.  While this arrangement is more expensive to the privately-held QFI than the terms for a publicly-traded QFI, the privately-held QFI does not need to worry about common equity dilution issues and will have less of a problem related to the market valuation of the Preferred Securities and Warrant Preferred issued to the UST (which represents an illiquid, minority ownership interest in a privately-held company).  However, for many privately-held QFIs, the additional cost of the funds that could be received from the UST may be the deciding factor in determining whether to participate in the CPP.

Bracewell & Giuliani will continue to monitor developments related to the above guidance and any forthcoming guidance on S Corporations and mutually-held institutions.


Term Sheet - Privately-Held QFIs

FAQ – Privately-Held QFIs


1 A company is "publicly traded" if (1) its securities are traded on a national securities exchange and (2) it is required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator.  A company may be required to do so by virtue of having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which applies to all companies that are traded on an exchange or that have $10 million in assets and 500 shareholders of record or Section 15(d) of the Exchange Act which requires companies that have filed a registration statement under the Securities Act of 1933, as amended, and have 300 or more security holders of record of the registered class to file reports required under Section 13 of the Exchange Act, e.g., periodic reports.

2 A CDFI is a specialized financial institution that works in market niches that are underserved by traditional financial institutions.  CDFIs provide a unique range of financial products and services in economically distressed target markets, such as mortgage financing for low-income and first-time homebuyers and not-for-profit developers, flexible underwriting and risk capital for needed community facilities, and technical assistance, commercial loans and investments to small start-up or expanding businesses in low-income areas.