United Community Bank has done something a lot of financial institutions might envy: It has sold $103 million of non-performing mortgages and bank-owned properties to an investor at book value and set itself up for a continuing cash infusion from stock sales in the bargain.
One of UCB’s lawyers, James W. Stevens at Kilpatrick Stockton, referred to the complex deal as a “new, new thing … it’s a new form of transaction.”
He said UCB, which is owned by Blairsville-based United Community Banks Inc., the third-largest bank holding company in Georgia, has been a client of the firm’s for more than 20 years. The bank and its lawyers put together a multipart deal, first agreeing to sell about 25 percent of its non-performing assets—primarily residential and commercial loans and other real estate owned properties—to New York-based Fletcher International Inc., represented in this deal by the New York and Palo Alto, Calif., offices of Skadden Arps Slate Meagher & Flom.
“They sold the assets at book value,” Stevens said. “You can move anything if you want to sell at a deep discount … so selling at book value was a big plus for them.”
Another part of the deal was a stock purchase agreement, which gave Fletcher the right to buy $65 million of the holding company’s preferred convertible stock at $1,000 per share, according to an 8-K filed with the Securities and Exchange Commission. Fletcher also gets a warrant in connection with the asset sale allowing it to buy common-stock-equivalent junior preferred stock exercisable up to $30 million. An additional $35 million will be granted if all the preferred stock is purchased.
If Fletcher doesn’t buy all the preferred stock, which is convertible to common stock, by May 2011, it must pay UCB 5 percent of the amount it did not purchase and an additional 5 percent of any amount not purchased by May 2012, according to one of UCB’s 8-K filings.
Another aspect of the deal, according to the SEC filings, was that UCB loaned about $82.4 million of the purchase price, and Fletcher paid $20.6 million in cash. Fletcher also deposited another $18 million with the bank to pre-fund an estimated three years’ of interest, principal amortization and other costs.
“This was something that came together through, honestly, just the persistence and creativity of the officers at United Community Banks,” Stevens said, speaking of CEO Jimmy Tallent, CFO Rex S. Schuette and Chief Risk Officer David Shearrow.
The deal came together quickly. Stevens said discussions began last year, but most of the work was done in a four-to-six-week period this spring thanks to what he jokingly called 12-hour “half-days” of work for the Kilpatrick team, which included Atlanta partners Hilary P. “Hil” Jordan and Richard R. Cheatham, and partner W. Randy Eaddy in Winston-Salem.
The deal needed to move quickly, Stevens said, because the stock aspect requires shareholder approval, and this meant relevant information had to appear in UCB’s April 15 proxy statement to prepare shareholders to vote on May 26.
“There’s a potential issuance of common stock as a result of this transaction in excess of 20 percent of the existing common stock,” he said. If the shareholders don’t approve that potential issuance, he said, “The deal will be capped at 19.99 percent.”