Buying Distressed Assets

Bonanza of Riches for Bank Rescuers

Posted on Thursday, November 11, 2010

Who wants to be an American community banker? It doesn’t seem to be an especially appealing profession these days. After all, scores of local lenders are failing every week. More than 143 have failed so far this year, including four last week. Regulatory red tape is on the rise. And all those “too big to fail” institutions bailed out by the government are back on their feet and are gunning for small-bank customers and depositors.
But the success of one executive, John Adam Kanas, may be sufficient to make small-time banking as attractive as the hedge fund business. Mr. Kanas is the chairman, president and chief executive of BankUnited, the 70-branch financial institution that he, along with a Who’s Who of private equity deal makers, bought on the cheap from the Federal Deposit Insurance Corporation last year.
BankUnited, which is based in Miami Lakes, Fla., recently filed to go public and raise fresh capital, just 18 months after its rescue, and subsequent handover, to Mr. Kanas and backers (which include Stephen A. Schwarzman of Blackstone and David Rubenstein of the Carlyle Group). By the look of things, it’s going to be an embarrassment of riches for the group. For the F.D.I.C. and its chairwoman, Sheila Bair, it won’t look good: the agency estimated losses of $4.9 billion on the deal.
That’s because a guarantee on over 80 percent of the failed bank’s assets from the F.D.I.C. is the gift that keeps on giving to BankUnited’s new owners. Payments that the regulatory insurance fund will make to BankUnited over the next few years carry an estimated net present value of about $800 million. As a result, BankUnited is widely expected to fetch a premium valuation to its $1.2 billion book value, or assets minus liabilities.
At 2.25 times book value, Mr. Kanas and his co-investors would see their initial $900 million investment triple. While that valuation may sound high, it would represent a not unreasonable multiple of some 12 times annualized earnings. That would value the 2.5 percent stake owned by Mr. Kanas at around $68 million.
Now, compared with his last job, it may not sound like such a windfall. Mr. Kanas rose through the ranks to run North Fork Bancorp, a Long Island regional bank, which he sold four years ago to Capital One for $14.6 billion. Capital One later availed itself of $3.55 billion from the Treasury’s bailout program. Mr. Kanas’s bonanza from the deal came to $185 million including vesting restricted stock, tax gross-ups and other goodies.
Of course, that was the culmination of decades of work. Mr. Kanas had been president and chief executive of North Fork since 1977. And he acknowledged at the time the payout was “an egregious amount of money,” but justifiable: “It’s not like I flew in here on a private jet three years ago and prettied up the company and then booted it out of here.”
But at 63, he doesn’t have quite as much time as he did earlier in his career. Lucky for him, BankUnited’s prospectus shows there may be ample opportunities for Mr. Kanas and his team to match, or even surpass, their North Fork haul. Most of the actual details on compensation remain blank. They will be filled in closer to BankUnited’s debut, and will include salary, bonus, options, nonequity incentive plans and pensions.
It’s the other equity incentives that look juiciest, particularly the award of “profits interest units” to Mr. Kanas. According to documents submitted to regulators, these “represent the right of the holder to share in distributions” of “an amount equal to 10 percent of the increase in the value” of BankUnited “after returns to our investors have been made.” Essentially, these grant Mr. Kanas and his team the kind of carried interest that private equity firms rely upon for the bulk of their investment returns.
How big a boon these will be only becomes clear when details are revealed closer to the I.P.O. And they will, perforce, depend on the medium-term performance of BankUnited’s stock price. Moreover, Mr. Kanas and his team have agreed to a number of restrictions on selling their shares. But combined with his extraordinary timing on the BankUnited deal and the rich guarantees provided by the F.D.I.C., there is every chance the Kanas touch will prove more lucrative this time around than his last golden trick.
By ROB COX
NYTimes.com


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