MatlinPatterson, a distressed debt specialist, has agreed to pay $250 million for a 70 percent stake in struggling Flagstar Bancorp, a publicly held saving bank, as long as the US federal government injects $250 million in the bank.
The New York-based private equity firm will buy its stake without approval from the bank’s shareholders, exploiting an exception to New York Stock Exchange regulations. The rules require shareholder approval prior to the issuance of securities representing 20 percent of the outstanding shares of a listed company.
The exception triggers in cases in which the delay involved in getting shareholder approval would seriously jeopardise the financial viability of the listed company.
MatlinPatterson is buying its shares through a structured acquisition vehicle that will allow the firm to meet the requirements of federal regulations mandating that an entity buying a bank be classified as a bank holding company, a source told PEO. No details about the structured acquisition vehicle were available, and MatlinPatterson did not return calls for comment. A Flagstar spokesperson declined to comment.
Flagstar, based in Michigan, has struggled this year. The bank, with $14.2 billion in total assets, reported a $61.2 million loss in the third quarter. Earlier this month, the NYSE notified the bank that its stock price was in violation of listing requirements, having been below $1 for more than 30 consecutive days. The bank’s shares were trading at 74 cents near the close of the market Thursday.
Jason Ren, an analyst with Morningstar, said the bank has about $3 billion worth of first-time mortgages located in areas hard-hit by the real estate downturn, including California, Florida and Michigan. He said he expects the bank to take more losses once it publishes updated numbers on its write-offs of 90-day deliquent loans.
Conditions for the deal to close include approval by the NYSE of the “financial viability” exception, as well as the receipt by the bank of $250 million from the US government’s Troubled Assets Relief Program (TARP).
The success of MatlinPatterson's investment in the bank hinges on how quickly the US housing market recovers, Ren said.
“This is pretty much a bet the housing market, in my opinion, won't be as bad as it seems,” Ren said.
MatlinPatterson is investing from its third buyout fund, which closed on $5 billion last year. The firm was founded by Credit Suisse First Boston alumni David Matlin and Mark Patterson. The firm has $9 billion under management between its private equity and hedge fund platforms.
Bank investing can be risky business these days. TPG lost its $2 billion investment in Washington Mutual when the bank was seized by federal regulators in September, who then sold its deposits and loan portfolio assets to JPMorgan.
Corsair Capital led a $985 million investment in Cleveland-based National City this year. PNC Financial Services Group agreed to buy National City for $5.2 billion, in a deal in which the US Treasury will take a $7.7 billion stake in the combined entity. Corsair has said it will be made whole on its investment.