BB&T Corp's (BBT.N) purchase of BankAtlantic Bancorp Inc's (BBX.N) lending business was blocked by a Delaware Chancery Court judge, who agreed with hedge-fund investors that the deal favored BankAtlantic's management over debtholders.
Vice Chancellor Travis Laster said the deal violated rights of investors by transferring most of BankAtlantic's assets to BB&T while leaving debt obligations and distressed assets behind.
Under the terms of the November 1 deal, BB&T agreed to absorb $2.1 billion in performing loans, $3.3 billion in deposits and 78 branches from BankAtlantic's bank subsidiary, which operates in South Florida. BB&T agreed to pay a premium of $301 million above the net asset value of BankAtlantic.
In response to Monday's ruling, BB&T spokeswoman Merrie Tolbert said the bank hoped BankAtlantic could reach an agreement with its investors. BankAtlantic Chairman and CEO Alan Levan said that "in the days ahead we will be considering all of the options available to us."
John Scannell, an executive at hedge fund Hildene Capital Management, one of the plaintiffs that brought the lawsuit, said the judge's ruling could stop similarly structured bank deals that potentially harm debt investors.
"We have this precedent here," said Scannell. "You see this is not allowed. We'll make sure (banks) are very aware of it."
If the deal had gone through as originally structured, distressed loans would have remained with BankAtlantic's holding company, which owed about $330 million to holders of its trust preferred securities, or TruPS.
Laster found the deal favored management and equity investors and violated the terms of the TruPS because BB&T was not assuming the debt obligations along with the assets, as the TruPS contracts required.
"The payments divert a portion of the deal consideration to Bancorp's controlling stockholders, vaulting them over the debt securities and other corporate constituencies," Laster wrote in his 42-page opinion.
BankAtlantic Bancorp's controlling shareholder, BFC Corp, is majority owned by Levan and BankAtlantic Bancorp Vice Chairman John Abdo.
TruPS securities were an attractive way for many smaller banks to raise capital because they combine features of debt and equity. However, many of those banks are now finding the TruPS to be a roadblock to new investment, because new equity funding at the holding company level flows first to overdue payments to TruPS investors.
Scannell said hundreds of banks are not current on their TruPS obligations and some are looking at deals similar to the one struck by BankAtlantic and BB&T.
"The whole BankAtlantic situation was what I consider to be the first of a wave of these things to happen. And had we not stopped it, it would have been bad for investors in any bank with TruPS outstanding," Scannell said.
Shares of BankAtlantic were down 2.5 percent at $2.73 Tuesday morning on the New York Stock Exchange. The stock hit $7 on the day the BB&T deal was announced. The stock plunged 16 percent Monday afternoon after Laster issued his ruling.
Shares of BB&T were down 1 percent at $29.49 on Tuesday, also on the New York Stock Exchange.
(Reporting By Tom Hals; editing by John Wallace)