Blank-Check Firm’s $400M Offer Hinges on CRE Pledge

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December 2, 2008 Tuesday

COMMUNITY BANKING; Pg. 5 Vol. 173 No. 231

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Blank-Check Firm's $400M Offer Hinges on CRE Pledge

Marissa Fajt

NRDC Acquisition Corp. is looking to inject as much as $400 million into a community bank that commits to using the added capital to turbocharge its commercial real estate lending.

With interest rates on commercial real estate loans nearly twice what they were a year ago, a bank with the resources to do more ofthis lending could soon be reaping hefty profits, according to Francis Casale, who is working with NRDC to identify acquisition targets.

"We have designed [NRDC] to provide operating capital to platforms that see opportunities to deploy it," he said in an interview last week. "We currently believe the opportunity is the greatest in the banking market to inject capital and earn outsized returns."

NRDC, of Purchase, N.Y., was formed in October 2007 as a special-purpose acquisition, or blank-check, company, and blank-check firms have had little success in their attempts to acquire banks.

Banking regulators also might be reluctant to bless a business plan that includes bulking up on commercial real estate loans at a time when collateral values are falling. Roughly two-thirds of the $27.9 billion of loans charged off in the third quarter were backed by real estate, according to the Federal Deposit Insurance Corp.'s Quarterly Banking Profile, which was released last week.

"Regulators are really cracking down and paying close attention to your concentrations" of real estate loans, said Jacob Thompson, a managing director with the Dallas investment banking company Commerce Street Capital. "If your business plan is to load up on commercial real estate because you see a great opportunity, I don't know how regulators would react to that."

Still, many banks need fresh capital, too, and the promise of a $400 million infusion from NRDC could trump any concerns about loan concentrations, industry watchers said. NRDC has said that it would retain the management team of any bank it acquires, which could give regulators a certain measure of comfort, said Sanford "Sandy" Brown, the Dallas office managing partner of Bracewell & Giuliani LLP.

"From a business perspective," NRDC's plan to help a bank accelerate its real estate lending "is a good idea and could be executed by the right management team very successfully," Mr. Brown said. "Somebody with dry powder - or excess capital - has the opportunity to make a lot of money right now."

Mr. Casale said investors and developers are having trouble getting real estate loans because many lenders have pulled back to tackle problem loans, preserve capital, or both. As competition has dwindled, lenders that are willing to make loans are able to charge rates as high as 15%, compared with an average of about 8% this time last year, Mr. Casale said.

"everyone is afraid to lend," he said. "An institution with a good team and the ability to lend ...will be able to put loans on the books at unprecedented spreads."

Blank-check companies are formed with the intention of buying other companies. They are publicly traded, and most of them promise in their prospectuses that if they do not have a deal in place within 18 months to two years, investors will get their money back, plus interest. NRDC has given itself until October 2009 to strike a deal.

NRDC's officers and directors include a mix of real estate investors and banking industry officials. One of its directors, Vincent S. Tese, is a former New York State superintendent of banks, and another, Michael J. Indiveri, is the chief financial officer of Amalgamated Bank in New York. He was also the CFO at City & Suburban Federal Savings Bank in Yonkers, N.Y., when it was sold last year to Ridgewood Savings Bank.

NRDC is eyeing banks with $500 million to $3 billion of assets. It would also consider a real estate investment trust or other financial services company, Mr. Casale said.

One reason blank-check companies have had a hard time getting deals done in the banking industry is that investors have been more interested in collecting on the accumulated interest and making money risk-free than in actually owning banks.

Earlier this year the first-ever completed bank deal by blank-check company came about only after dissenting shareholders were bought out. (In that dealCommunity Bankers Acquisition Corp. in Great Falls, Va., simultaneously acquired two banks: TransCommunity Financial Group in Glen Allen and BOE Financial Services of Virginia Inc. in Tappanhanock.)

Another blank-check company,Coastal Bancshares Acquisition Corp. in Houston, had an agreementto buy Intercontinental Bank Shares Corp. in San Antonio, but it was quashed in 2006 after investors voted against it.

Mr. Casale said NRDC is avoiding the no-vote deal-killer by aggressively marketing itself to those who would be interested in owning a bank and capitalizing on opportunities in the market.

"The people who will be important for me to demonstrate that this is a good idea are going to be people who invest in banks," he said. "They will have to believe the type of bank we are bringing to market is a very solid bank and is worth the number of shares we have outstanding."

Bracewell & Giuliani's Mr. Brown said now might be the perfect time to get those investors on board.

"We have been getting lots of questions from nonbank clients, those in the hedgefund world, who are trying to find ways into the banking business," he said. "There will be capital available for a business plan like this."

Also, NRDC is structured so that it allows up to 30% of its shareholders to veto a deal, versus the 20% that sank Coastal. Still, with an arbitrage that would result in almost a 10% increase on the initial investment, it might be difficult to ward off those who vote no just to cash the shares in for a quick profit.

NRDC's stock is currently trading at around $9.12, and the expected liquidation value in October 2009 is $9.93. "If I wanted to park some money for nine months and didn't have anything better to do with it, in this market I would be all over that," Commerce Street Capital's Mr. Thompson said.

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December 1, 2008