UPDATE 2-SWS swaps 34 pct stake to investors for $100 mln

Mon Mar 21, 2011 9:20am EDT

* Hilltop, Oak Hill Capital to lend $50 mln each

* SWS to issue warrants convertible to 34 pct stake

* Talks with the two investors under way "for months"

* SWS shares slip slightly trading before the bell (Adds background on investors, byline)

By Joseph A. Giannone

NEW YORK, March 21 (Reuters) - SWS Group Inc (SWS.N), a broker-dealer weakened by commercial real-estate losses, sold the equivalent of a 17 percent stake to each of two investors for $100 million in loans just days after rejecting a $200 million unsolicited acquisition offer from a rival brokerage.

Rescuing the Dallas-based parent of Southwest Securities from a distressed, fire-sale deal are firms with links to two legendary Texas investors, Gerald J. Ford and Robert Bass.

SWS on Monday said it agreed to issue stock warrants to Hilltop Holdings Inc (HTH.N) and Oak Hill Capital Partners in exchange for $50 million loans from each, pending SWS meeting certain conditions.

The loans will pay 8 percent interest and mature in five years, though they can be prepaid by SWS under certain conditions after three years.

The stock warrants will let Hilltop and Oak Hill each buy 8.7 million SWS shares at an exercise price of $5.75 a share, a transaction that would give each of the two investors a 17 percent stake. One representative from each of the investors will join the SWS board.

"SWS Group believes that the $100 million capital raise will address the asset quality issues at the bank while adhering to the increased capital requirements imposed" by federal bank regulators, SWS said.

Shares of SWS slipped 4 cents to $6.11 in trading before the opening bell on the New York Stock Exchange..

Last week SWS rejected the latest in a series of takeover offers from closely held Sterne Agee & Leach, a brokerage firm based in Birmingham, Alabama. SWS said the $200 million offer was not in its shareholders' best interests.

Hilltop is a publicly traded investment vehicle led by Ford, who made a fortune investing in banks and thrifts humbled by the U.S. savings and loan crisis of the late 1980s and early '90s. Ford in 2002 sold Golden State Bancorp, a California thrift, to Citigroup (C.N) for about $6 billion.

Oak Hill is a private-equity investment firm with $8.2 billion of committed capital that was founded by Bass, a multibillionaire and one of the four Bass brothers who gained fame in making myriad investments since the '80s. (Reporting by Joseph A. Giannone, editing by Dave Zimmerman)

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