tarp warrant valuations

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Post on 13-Jan-2015



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This presentation provides an overview of the valuation (fair market value) of the warrants issued to the Treasury by banks participating in the "TARP" Capital Adequacy Program.


  • 1. About Us Pluris Valuation Advisors LLC is a valuation firm headquartered in New York. We believe Pluris values more warrant positions than any other valuation firm in the United States. Pluris combines valuation and technical accounting expertise in its development and application of valuation methodology in compliance with tax valuation LEADING standards, as well as U.S. GAAP and IFRS. WARRANT Specific assets valued include warrants and other restricted securities of VALUATION FIRM IN THE public companies, auction rate securities, collateralized debt obligations, asset backed securities, distressed debt, bankruptcy UNITED STATES claims, limited partnerships, and other assets that lack liquidity. Pluris valuations are also used for tax purposes and litigation support. Our proprietary LiquiStat database enables Pluris to value even the most illiquid securities based on market data from the secondary market. Pluris access to professionals operating the largest secondary marketplace for illiquid warrants provides us with market color that cannot be captured in academic research or databases.1

2. Our Clients Include Global Financial Institutions that require Public companies that need valuations of hard-to-value illiquid or illiquid securities valued in order to distressed securities comply with the fair value rules of U.S. GAAP or IFRS Hedge Funds and other investment advisors that need their Large estates and high net worth portfolios valued for their monthly families who need assets valued for and quarterly investor statements estate-planning purposesLitigants who need expert testimony for lawsuits involving securities and enterprise values.2 3. The Pluris Advantage Rules of thumb, or theory alone, are notappropriate for valuations of illiquid warrants.Individual discount determinations areneeded. This requires market data. LiquiStatcontains more data on trades in illiquidwarrants than any other study. Very little empirical transaction data exists onLiquiStatthe market for illiquid securities. Plurisexclusive access to the LiquiStat databaseof restricted securities transactions onSecondMarket is unique.database Our proprietary LiquiStat database providesthe comprehensive data from real-worldtransactions that is needed togenerate, document and support valuationsof illiquid assets. Unlike data on private placements by theissuer, where discounts may result frommany factors, LiquiStat data comes fromarms-length investor trades in restrictedsecurities, that are a pure reflection of fairvalue. LiquiStat, along with our capital marketsexpertise and in-depth knowledge of the legaland regulatory environment for restrictedsecurities, ensures our clients get the mostaccurate valuations possible. 3 4. Repurchase Procedure After the full redemption of preferred shares, each Bank may repurchase warrants using these procedures: Bank provides the Treasury with its own determination of the Fair MarketValue, relying on the opinion of an appraiser If the Treasury objects, the Bank and Treasury meet to resolve differences If differences are not resolved, the Appraisal Procedure is invoked, asfollows: Both Treasury and Bank each select an appraiser, each of whom do their own valuation of the Warrants and attempt to agree If the two appraisers do not agree on the value, the two appraisers agree on a third appraiser The three valuations are averaged, rejecting wide outliers, and this average is binding on both parties 4 5. How to Get There It is critical that each valuation for this purpose is backed by research that: Is based on arms-length transactions in illiquid warrants, as empiricaldata has great potential for resolving conflicts, while theoretical model prices are more likely to prolong disagreements (in a world of made-to-order opinions) Is specifically tailored to provide valuation discounts suitable for this purpose (valuation discounts for entities with similar financial characteristics) Provides ranges and tolerances around central estimates, to further enhance decision making during the negotiation process Is based on well-recognized models and statistical methods5 6. Warrant Basics Warrants are long-term call options on the issuers own stock. The valuation of a warrant is impacted by: The terms of the warrants (exercise Trading characteristics of the underlying price, expiration date, anti-dilution security protection, transferability, etc) (exchange, volume, price, volatility, etc.) Other rights, preferences, privileges, and Ability to borrow the shares for purposes restrictions of the underlying securityof shorting/hedging (registration rights, registration Precedent sale transactions completed in status, etc.)the secondary market. Time until the restriction(s) are released Fundamental financial and other characteristics of the company 6 7. TARP Warrants Approximately 579 banks received TARP money. This includes 290 publicly traded banks with still-outstanding warrants. Typical terms include: Ten years to expiration Warrants for 15% of preferred shares Exercise prices based on the 20-day Customary anti-dilution provisions trailing average stock price before CPP No voting rights application date Shelf registration and piggyback rights American options Banks* Number of WarrantsAggregate Intrinsic Aggregate Market Cap(millions) Value ($m) ($m)All TARP Banks withWarrants (290) 1,440 523 650,862All With In-the-MoneyWarrants (40)206 523 131,475All With Out-of-the-Money Warrants (250) 1,235NA 519,387* All publicly traded CPP recipient banks with still-outstanding warrants. Data as of May 15, 2009. 7 8. Warrant Illiquidity Discounts Illiquidity discounts apply to all restricted and otherwise illiquid securities. Discounts apply to theoretical model prices. Transaction data from private placement studies supplement our research. Pluris Transaction data from arms-length uses all industry-standard databases. investor trades in restricted securities from the LiquiStat database serve as the An analysis of borrowing rates, if the empirical foundation for determining the security is borrowable, or hedging discount.costs, if it is hedgable, can provideadditional support. Academic research indicates options without trading are worth significantly less Other value indications can be than options that are traded. This shoulddetermined based on theoretical apply to illiquid warrants too.models, such as the Longstaff andFinnerty models, for restricted stock.The discount for lack of liquidity is based on a combination of all relevant factors, methods, and empirical data; and appraiser judgment. 8 9. Meet the Team Espen Robak, CFA, President Elpida Tzilianos, PhD, Senior AssociatePresident of Pluris Valuation Advisors LLC, is a nationally Head of New Product Development, also leads our illiquid recognized expert on private warrants, illiquid debt instrumentsequities valuation practice while providing support for Pluris (including auctionrate securities), FAS 157, valuations forbankruptcy practice. Ms. Tzilianos valuation experience alternative investment managers, and discounts for lack ofincludes restricted stock, warrants, debentures (convertible and liquidity; and a prolific author on valuation, accounting, andnon-convertible) and other hard-to-value, illiquid and/or taxation topics. Recent article topics include fair value of illiquid distressed securities. Prior to joining Pluris, Ms. Tzilianos was a securities, auctionrate securities valuation, PIPE (privateResearch Associate at Finnerty Economic Consulting LLC, a investment in public equity) valuations, amendments to Rule litigation support, valuation, and financial consulting firm where 144, illiquidity discounts, valuation of stock options, M&A she conducted extensive private placement research and arbitrage data, and restricted stock marketability discounts. Mr. complex modeling on restricted securities. Ms. Tzilianos also Robaks expert commentary has been featured in the Wall taught as an adjunct professor at both Manhattan College and Street Journal, Financial Times, Forbes, CFOFordham Universitys Deming Scholars MBA Program. Ms. Magazine, Bloomberg, Absolute Return, American Banker, TheTzilianos received her PhD in Economics from Fordham Deal, Compliance Week, Inside MarketUniversity in 2006. Data, Opalesque, Accredited Investor, and Hedge Fund Manager Week. He is a columnist for Wealth Strategies Eric Liu, Head of Research Journal. Head of Research, is responsible for research on illiquid Rick Martin, CPA, Vice Presidentsecurities and for developing valuation models for illiquid equity securities, auction-rate securities, limited partnership Vice President of Technical Accounting, is in charge of interests, bankruptcy claims, and other illiquid assets. He is resolution of technical accounting issues as they pertain to ourprimarily in charge of the maintenance and transactions analysis valuation clients, and manages our relationships with audit required for the LiquiStat database. Furthermore, as a member professionals. Mr. Martins valuation experience encompassesof the Product Development team, he assists in developing and warrants, convertible preferred shares, and other restrictedexpanding the firms business lines. Prior to joining Pluris, Mr. securities. Prior to joining Pluris, Mr. Martin served as Head of Liu worked for Merrill Lynch and Haver Analytics where he Technical Accounting at Cowen and Company in New York gained asset management, and economic and financial research and Senior Technical Accounting Advisor at Credit Suisse in experience. He also has four years of engineering and project Zurich. Prior to Credit Suisse, Mr. Martin also held advisory management experience in the IT/Telecom industry in China. roles in financial services at each of the Big Four accountingMr. Liu earned his Masters of Business Administration from firms since 1997. Pace University and his