Monday, May 17, 2010

Wilbur Ross Sees More Bank Roll-Ups

MAY 17, 2010, 11:22 AM GMT

By Lisa Lee, Wall Street Journal

While most private equity investors have been frustrated in their efforts to buy failed banks, Wilbur Ross recently struck his third bailout deal with the Federal Deposit Insurance Corp.

In a Dow Jones Investment Banker interview about the investment, Ross predicts that the banking sector’s problems will drag out for years because “you have almost a trillion dollars of maturity of high-yield bonds in the next five years [and] … another trillion dollars of maturities of commercial mortgages.” In Europe, meanwhile, German and French banks are exposed to the sovereign credit problems.

In a deal announced last month, Ross’s investment firm, WL Ross & Co., backed a tiny but healthy $100 million (assets) bank, First Michigan Bancorp, of Troy, Mich., in its purchase of CF Bancorp, a much larger failed bank in Michigan with assets of about $1.65 billion at year-end 2009 and $1.43 billion in deposits.

WL Ross invested $50 million for a 24.9% stake in First Michigan as part of a $200 million infusion that included other unnamed investors. With the new capital, First Michigan took about $870 million of CF’s assets, all of its deposits and each of its 22 branches. (The FDIC will share losses on $808 million in assets.) Ross says his firm would invest more if First Michigan is able buy more failed banks in Michigan, Ohio and surrounding areas.

Ross sees the potential for more roll-ups in the Midwest and says his firm has looked at 300 or 400 banks in all. But few distressed banks can be rescued without government assistance to cleanse their balance sheets, he says. “The hole is too big. You can only fix a bank outside the FDIC if it does have some positive net worth left.” Most troubled banks do not, he says.

To work off subprime asset issues, banks need to write down principle amounts to reflect the reduced value of the properties. Merely cutting interest rates or extending maturities won’t give borrowers the motivation to keep paying, he says.

One of Ross’s prior bank investments, his 24.9% stake in Florida’s BankUnited Financial, also was a prelude to bolt-on deals in that state as well as possibly Georgia. But the deal, announced a year ago, was much larger, with $900 million of new capital, and WL Ross was part of a private equity consortium with Carlyle Investment Management, Blackstone Capital Partners and Centerbridge Capital Partners. It was one of the few deals in which buyout firms were able to buy control of a failed institution from the agency.

Ross’s other FDIC deal was an asset-only purchase, from Corus Bankshares Inc. Along with Starwood Capital Group, WL Ross bought $4.5 billion of distressed real estate loans that the FDIC could not sell to MB Financial Bank.

In Europe, WL Ross holds roughly a 20% interest in Virgin Money and supported its unsuccessful pursuit of 300 branches of the Royal Bank of Scotland.

While some private equity firms are forming blind pools to comply with the FDIC’s limits on private equity ownership of banks, “We’re not keen on blind pools,” Ross says. He believes the structure puts too much pressure on management teams to deploy capital.

Dow Jones Investment Banker