Lost in all the noise and news about Bank of America's (NYSE:BAC) raising capital and repurchasing its TARP preferred stock, the first public auction of TARP securities was completed last week.
When the U.S. Treasury purchased preferred shares in many of the nation's banks under TARP, the government received 10-year warrants as part of the deal. Each warrant is an option to buy one share of common stock. Most banks that have repurchased preferred stock have also repurchased their warrants. However, in some cases, the government still owns the warrants and needs to dispose of them.
The warrants don't get covered as often as other aspects of TARP, but they offer some of the program's best upside potential. For example, when Goldman Sachs (NYSE:GS) repurchased TARP preferred, it not only repaid the $10 billion taxpayer investment plus $318 million in dividends, but also coughed up another $1.1 billion to buy its warrants.
On Nov. 19, the Treasury announced plans to auction warrants held in Capital One Financial (NYSE:COF), JPMorgan Chase (NYSE:JPM), and TCF Financial (NYSE:TCB) using a modified Dutch auction. The auction for the Capital One warrants sold all 12.7 million warrants at $11.75 each, for a total of $146.5 million. For Capital One, the warrant strike price is $42.13. Auctions for JPMorgan and TCF Financial warrants are expected before the end of 2009.
The clearing price for the auction is set at the highest price that sells all the warrants, or the lowest bid price if there aren't enough bids to cover all the warrants. For the Capital One auction, the minimum bid price was $7.50, and the clearing price was $11.75. The minimum lot size for bidding was 100 warrants, so the process was sized to allow participation by individual investors.
A number of banks have repurchased their TARP preferred stock, but not their warrants. The following table lists banks with the following criteria:
- They have a market cap of at least $300 million.
- They repurchased TARP preferred stock, but the Treasury still holds their warrants.
- More than two months have elapsed since they bought back their preferred stock.
|
Bank |
Dec 8, 2009, |
Warrant Strike Price |
|---|---|---|
|
JPMorgan Chase |
$41.13 |
$42.42 |
|
TCF Financial |
$12.83 |
$16.93 |
|
Signature Bank (NASDAQ:SBNY) |
$30.88 |
$30.21 |
|
F.N.B. (NYSE:FNB) |
$6.71 |
$11.52 |
|
WesBanco |
$12.59 |
$25.61 |
|
Sterling Bancshares |
$4.63 |
$7.18 |
|
Texas Capital Bancshares |
$14.41 |
$14.84 |
Source: financialstability.gov and Yahoo! Finance.
Other than JPMorgan Chase and TCF Financial, no auction plans have been announced for these warrants. Based on the Capital One auction, investors should expect auctions to take place only a few days after release of a prospectus.
Anyone considering bidding on the warrants should be aware that warrants don't have shareholder voting rights and don't earn dividends. Like call options, they are a way to get the stock's upside potential at a lower price than buying shares, but they can expire worthless if the stock price doesn't climb above the strike price. Foolish investors interested in these warrants will plan ahead, determine a bid price, and read the prospectus carefully before making a bid.
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