Private-equity firms are showing more confidence that credit-quality problems are ebbing.
Several recent capital infusions have caught the eye of analysts, especially an announcement on Monday by Brand Group Holdings Inc. that it would raise up to $200 million through affiliates of Carlyle Group, Stephens Group LLC and Nonami LLC, owned by the Cousins family in Atlanta. Analysts said the deal is the first time in years that private equity has made a big traditional investment in Georgia, rather than using shelf charters or failed banks.
To some, the transaction is the latest signal that heavier-pocketed investors are more at ease with banks' abilities to address credit problems. The fact that the Brand deal is taking place in Atlanta, where residential construction has inflated credit losses, gives some observers more comfort.
"This deal is very significant," said Walter Moeling 4th, a partner at Bryan Cave in Atlanta who helped put it together. "We haven't had a significant infusion of capital in any Atlanta-based community bank in three years, essentially. … The banks that are still standing may be battered and bruised but, by God, they're still standing and the biggest hits have been taken."
Two other capital raises were announced in the past week. United Western Bancorp Inc. in Denver on Friday announced a $103 million capital raise through three investor groups, and Central Pacific Financial Corp. in Honolulu on Tuesday said it was negotiating with two groups for a majority of its $325 million planned capital raise.
Other observers, however, are not convinced that the weight is being lifted. Rather, they argue that the latest deals could be a result of private-equity groups running out of time to deploy their investments after sitting on commitments for more than a year.
Investors "have pressured firms to put their money to work and they are tired of waiting around," said Dory Wiley, the president and chief executive of Commerce Street Capital LLC in Dallas. "Some people believe the falling-knife deals are over, but I would argue that there are still some out there."
This lingering concern is also evident in how agreements are being structured to let the investor firms feel comfortable enough to inject equity.
In the agreements with Brand Group, its banking subsidiary, Brand Banking Co. nearly tripled its loan-loss allowance to $60 million in the third quarter, triggering a drop in capital ratios, compared with $22.7 million a quarter earlier.
The CEO of the company and the bank, Bartow Morgan Jr., said in an interview Monday that Brand Group started looking to raise capital in late 2008 to expand organically through northern Atlanta. Morgan's family, which has owned a majority of the company since 1905, had to give up some of its stake to facilitate the deal. "Some things had to change in order to achieve our goals," Morgan said.
Beyond that, the $1.2 billion-asset Brand Bank is adding some well-recognized names to its management and board. The former BankSouth Corp.'s principal operating officer, John McKinley, and its CEO, Patrick Flinn, will join Brand Group. Flinn will serve as an independent director at Brand Group, while McKinley will be executive chairman for the parent company and bank.
"John brings that near-legendary credit background that is going to be so critical for banks going forward," Moeling said.
The Brand Group deal will add several directors, representing the nvestor groups and two independent directors, pending regulatory approval.
Analysts agreed that private investment firms are going to be much more hands-on when it comes to investing in banks going forward. In another recently announced deal, United Western entered into an agreement with affiliates of Lovell Minnick Partners LLC, Oak Hill Capital Management LLC and entities controlled by Henry "Ric" Duques for a $103 million investment that is part of a proposed $200 million recapitalization. As part of the agreement, Lovell Minnick and Oak Hill Capital can appoint a director and nonvoting observer to the board. United Western executives said they could not comment because of the pending capital raise.
Analysts said investors' comfort level will vary depending on credit quality at the bank level and economic cycle. A key ingredient is management's capabilities, said Tom Goldstein, a former executive at LaSalle Bank Corp. and principal at a bank acquisition company in Chicago, GRG Group. "For this to work, you need to have a management team who has worked together and has a real strategic approach as to how they are going to compete and grow in the market," Goldstein said. "It's not just about rolling up banks."