By Beth Vessel

The U.S. Treasury Department released the term sheet and answers to frequently asked questions for privately held financial institutions applying for the capital purchase program.  You can see the term sheet at this link and the frequently asked questions here.

The application deadline for privately held institutions is Monday, Dec. 8, 2008.  The term sheet does not cover S-corporations.  Treasury has indicated that the structure for such entities is still under consideration, and the December 8 deadline will therefore not apply to S-corporations. 

The new term sheet provides that Treasury shall not effect any transfer of the preferred securities that would require the financial institution to become subject to periodic reporting requirements.  If the financial institution becomes subject to these requirements, it will be required to file a shelf registration statement covering the preferred stock, the warrants and the shares of preferred stock issuable upon exercise of the warrants.

The terms of the preferred securities are otherwise similar to the terms previously applied to publicly held financial institutions, with a few exceptions.  You can find a comparison of the two term sheets by clicking here.

• Common Dividends:  In addition to the consent requirement for any increase in common dividends for the first three years of the investment, the new term sheet requires Treasury’s consent for any increase in common dividends per share greater than 3 percent per annum between the third and tenth anniversary of the date of the investment.
• Repurchases:  The private company term sheet generally requires Treasury’s consent to the repurchase of equity or trust preferred securities until the tenth anniversary of the date of investment, while the term sheet for public institutions had such a restriction for only three years.
• Other Dividend and Repurchase Restrictions: The private company term sheet prohibits the financial institution from paying common dividends or repurchasing securities during the first 10 years after the investment.
• Related Party Transactions:  The private company term sheet provides that the financial institution may not enter into transactions with related persons unless the transactions are on terms no less favorable than could be obtained from an unaffiliated third party and have been approved by the institution’s audit committee or comparable body.
• Warrant Terms: The private company term sheet provides for warrants to purchase preferred stock (rather than common stock, as was the case with the public company term sheet) having a liquidation preference equal to 5 percent of the preferred stock (rather than 15 percent, as was the case for public companies).  The initial exercise price for the warrants is set at $0.01 per share or such greater amount as the company’s charter may require as the par value per share.  There is no reduction in the number of warrants based on receipt of proceeds from qualified equity offerings, and the private company term sheet provides that Treasury intends to exercise the warrants immediately.  The preferred shares received upon exercise of the warrants will pay dividends at a rate of 9 percent per year.

The frequently asked questions indicate that Treasury will exempt investments from the warrant requirements if:

• the size of the investment is $50 million or less; and
• the financial institution is a certified Community Development Financial Institution.

CDFIs are specialized financial institutions that work in market niches that are underserved by traditional financial institutions, providing services in economically distressed target markets, such as mortgage financing for low-income and first-time homebuyers and not-for-profit developers, flexible underwriting and risk capital for needed community facilities and technical assistance, commercial loans and investments to small start-up or expanding businesses in low income areas.  In order to qualify for this exemption, a financial institution must have a completed application to be a CDFI at the time the CPP application is filed, and the CDFI application must be approved at the time of the closing of the investment.  You can find additional information about becoming a CDFI here.