U.S. Treasury's Financial Stability Plan - Terms and Conditions of Capital Assistance Program
The Capital Assistance Program is a core element of the Financial Stability Plan announced on February 10, 2009. Additional components of the plan include: a Consumer Business Lending Initiative to unfreeze secondary credit markets, a Public Private Investment Fund to raise capital to purchase legacy assets, and a Homeowner Affordability and Stability Plan to restructure or refinance mortgages to help as many as 7-9 million families stay in their homes. On February 25th, the U.S. Treasury announced the terms and conditions of the Capital Assistance Program (“CAP”).
- Capital provided under the CAP will be in the form of a preferred security that is convertible into common equity at a 10 percent discount to the price prevailing prior to February 9th.
- CAP securities will carry a 9 percent dividend yield and would be convertible at the issuer’s option (subject to the approval of their regulator).
- After 7 years, the security would automatically convert into common equity if not redeemed or converted before that date.
- The instrument is designed to give banks the incentive to replace U.S. Government provided capital with private capital or to redeem the U.S. Government capital when conditions permit.
- With supervisory approval, banks will be able to request capital under the CAP in addition to their existing TARP Capital Purchase Program preferred stock (CPP).
- With supervisory approval, banks will also be allowed to apply to exchange the existing CPP preferred stock for the new CAP instrument.
- Recipients of capital under the CAP will be subject to the executive compensation requirements in line with the Emergency Economic Stabilization Act of 2008, as recently amended. The Treasury will shortly be releasing rules to implement these amendments.
- As part of the application process, banks must submit a plan for how they intend to use the capital to preserve and strengthen their lending capacity – specifically, to increase lending above levels relative to what would have been possible without government support. The Treasury Department will make these plans public when the bank receives the capital under the CAP.
- Taxpayers will be able to monitor the performance of banks receiving capital under the CAP. Banks receiving capital will be required to submit to Treasury monthly reports on their lending broken out by category. These will be posted on www.FinancialStability.gov.
- Recipients will also be subject to restrictions on paying quarterly common stock dividends, repurchasing shares, and pursuing cash acquisitions.