National City’s “Buyout”

Today, National City announced its long-awaited plan to attract new equity capital, in order to shore up its balance sheet, which had been racked by large loan writeoffs.  Investors are putting $7 billion into National City in the form of new shares, at a price of $5 per share.  These investors are being led by buyout firm Corsair Capital, which is investing $985 million, and the rest of the capital is coming from large institutional shareholders, likely most of whom are existing shareholders.  Interestingly, one investor is Michael Dell, founder of Dell Computer.  This will raise the bank’s “Tier 1” capital from 6.65%, which is very low, to 11.4%, which is very high.  Presumably, this will provide some cushion for big writeoffs to continue in coming quarters.  Not surprisingly, as part of the deal, the bank is slashing its quarterly dividend, to $.01 per share.

According to our back-of-the-envelope calculations, existing shareholders will retain only 31.2% of the company’s shares, with the other 68.8% going to new shareholders, at a 40% discount to Friday’s closing price.  Surely it’s a testament to how dire the situation had become at National City, and surely much worse than most people expected.  But it should at least allow the bank to stave off bankruptcy.  Some reports have surfaced that the highest offers National City received to buy the entire bank were only $3 per share.

The new share issuance is subject to a vote by shareholders, who could decide to vote it down in lieu of a higher price.  Bear Stearns’ shareholders somehow convinced JP Morgan to raise its bid from $2 to $10 per share.  But then again the investors could be prepared to walk from the deal, so it could be risky for shareholders to turn it down.  Investors must ask themselves:  “if things were all right at National City, would management have decided to do this deal?”  Obviously not.  Bottom-line, while the price paid by existing shareholders was steep, the bank seems to be saved.  All the major credit rating agencies affirmed their ratings on National City in the wake of the deal.

The bank also released its earnings report for the first quarter, which featured a $1.4 billion addition to its loan loss reserves, and net chargeoffs of $538 million.  Meanwhile, nonperforming loans rose to $2.3 billion from $1.5 billion at the end of 2007.  Aside from credit problems, the bank is actually performing okay.  Average earning assets (loans and securities—where the bank makes its money) in the first quarter were even with the fourth quarter, and fairly even to the first quarter of last year, excluding the effects of recent acquisitions.  Deposits showed the same pattern—fairly flat.  So bank customers aren’t running for the hills.  Service charges even rose slightly compared with last year’s first quarter.


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