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The U.S. Department of the Treasury announced Tuesday that it has launched a secondary public offering of about 12.66 million warrants to purchase the common stock of financial service provider Capital One Financial Corp. (COF). The public offering price and the allocation of the warrants in this offering will be determined by an auction process. These warrants expire on November 14, 2018. Each warrant initially represents the right to purchase one share of our common stock, and the number of shares deliverable upon the exercise of each warrant is subject to the adjustments.
In a filing with the U.S. Securities and Exchange Commission or SEC, the Treasury noted that each of these warrants represent the right to purchase one share of our common stock at an exercise price of $42.13 per share, subject to adjustment from time to time. On November 30, 2009, the last reported sale price of Capital One common stock on the NYSE was $38.36 per share.
The exercise price for the offering cannot be paid in cash and is payable only by netting out a number of shares of Capital One common stock issuable upon exercise of the warrants equal to the value of the aggregate exercise price of the warrants. The company will have a total of 449.61 million shares of common stock outstanding after this offering.
Under the auction process, a bid should me made for a minimum of 100 warrants at a minimum bid price of $7.50 per warrant, and in increments of $0.25 thereafter. The offering is expected to price through a modified Dutch auction methodology that establishes a market price by allowing investors to submit bids at specified increments above a minimum price specified for each auction.
The Treasury noted that the proceeds of this sale will provide an additional return to the American taxpayer from Treasury's investment in the company beyond the dividend payments it received on the related preferred stock. McLean, Virginia-based Capital One Financial bailed-out with $3.55 billion of federal funds under the TARP Capital Purchase Program in October 2008.
Earlier on November 19, the Treasury announced its intention to dispose of several warrant positions received in consideration for investments made under the TARP Capital Purchase Program. The Treasury then said that it intends to conduct auctions to sell its warrant positions in JP Morgan Chase & Co. (JPM), Capital One Financial, and TCF Financial Corp. (TCB) over the next month.
Each of these banks has fully repurchased Treasury's preferred stock investment. Treasury expects to conduct similar auctions in the future for other warrant positions it holds in banks that have repaid TARP investments.
Deutsche Bank Securities Inc. is the sole book-running manager and Siebert Capital Markets is the co-manager for the offering. Deutsche Bank Securities revealed later that the auction will commence at 8 a.m. Eastern Time on December 3, 2009, and will close at 6.30 p.m. on that same day. The underwriting discounts and commissions are 1.5% of the public offering price per warrant.
More than 600 banks across the country have participated in TARP, representing $199 billion in investments, as part of an effort to stabilize the financial system. After repaying their TARP preferred stock, institutions also have the right to repurchase the warrants issued to Treasury for their appraised market value.
As of date, $73 billion of TARP investments have been repaid to the Treasury. On top of the repayments, Treasury has received $6.8 billion in dividend income and $2.9 billion in warrant related income. It anticipates another $50 billion in repayments over the next 12-18 months.
The TARP was an instrument set up last year to prop up the U.S. financial system after big bets on mortgage-related assets pushed many institutions toward collapse. Following the collapse of Lehman Brothers Holdings Inc. (LEHMQ.PK) and various events that rocked the financial sector last year, Goldman Sachs and the other surviving brokerage giant Morgan Stanley became bank holding companies in September, providing them with access to the federal government's $700 billion rescue plan.
COF closed Tuesday's regular trading session at $38.09, down $0.27 or 0.70% on a volume of 6.52 million shares, lower than the three-month average volume of 7.32 million shares.
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