Has anyone read the proxy dated November 2 nd and come to any estimate on how many common shares are going to be offered in exchange for the IBCPO trust preferred? How are these exchange offers priced? This proposal is subject to shareholder approval at the special shareholder meeting.
Over at CRBC in the earnings call they indicated that a similar exchange was very successful and increased tangible common equity. Anyone with more insight than I have an opinion about this proposal?
Ok, I may draw some false conclusions here but after looking at the proxy and financials statements i came to the following observations:
1) The preferred stock is held on the balance sheet in shareholders equity 2) Also in shareholder equity is the par of the common stock, paid in capital, retained earnings, etc. 3) The Feds are using tangible common equity as the benchmark for a well capitalized bank, one way to raise the common equity is esstentially to do an accounting change from preferred to common by paying for the preferred with common shares 4) Clearly the bank needs to raise equity, but who who going to buy IBCP stock on the open market? Intuitively this manuever seems to be dilutive to common shareholders but maybe not as much as a pure equity option of raising capital. What i can't reason thru is the impact on the book value of the company after the shares are issued in a pure common offering vs. this preferred exchange.
I am not married to this logic, what do some of you smart guys think? In addition to CRBC mentioned above Citigroup did a similar exchange earlier this year and both were applauded by the analysts.
According to the proxy statement they want to convert 39.5 million, 50.6 million and 72 million in debt to common shares. At 70 cents a share that's 231.5 million of new shares that will be issued. Almost 10X the current amount of shares outstanding? Ouch
Lets look at the facts. IBCP has about 24 million shares outstanding with the ability to issue up to 60 million shares. The proxy will amend that to allow IBCP to issue up to 500 million shares. A major dilution, how will that be good for shareholders?
you can do the math. usually the preferred shares will convert at a premium. in this case mayby 20% or 60 cents a common share. Divide .60 into the current $ value of the shares to convert and you will have number of common shares to be issued.
The bottom line is that you will have massive dilution of the common shares if the shares to convert were to say be 75 million $$.
75 million $$ would be about 125 million common shares to be issued.