Some reports have said that the Treasury’s equity-injection program is “not dilutive” to common shareholders. Of course it is. The injection won’t vaporize common shareholders, but in most cases it will be modestly dilutive (from the warrants). And common shareholders will still be exposed if and when the banks decide to raise new capital and/or write down the value of assets again.
- Size: Treasury offering capital between 1%-3% of risk-weighted assets (max. $25 billion)
- Money will actually be injected by the end of the year.
- Treasury buying senior preferred stock and warrants
- Banks have until Nov. 14 to decide whether to participate
Preferred Stock Details:
- Senior preferred stock, counts as Tier 1 capital
- Senior to common stock and junior preferred, equal to other senior preferred
- 5% dividend for five years, then 9% thereafter
- Non voting stock
- Callable after three years or earlier if taken out with Tier 1 common or preferred offering
- Treasury can sell the preferred at any time
- Treasury gets warrants totalling 15% of investment
- Warrant strike price is 20-day trailing average on date of issuance (presumably end of November).
The level of dilution will vary depending on the institution and will be the result of:
- Additional 15% of amount of capital injected from warrants. The perpetual preferred itself is not convertible into common equity and is therefore treated as debt, not equity.
All dividends on existing preferred and common stock will continue to be paid unless there’s not enough money left over after paying the Treasury.
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