Private Equity Case Study
A private equity firm desired to sell one of its portfolio companies. The company, with sales of $75 million, was a leader in the fashion industry. The incumbent Chief Financial Officer and Controller left at the start of the sale process.
The company could not hire another full-time Chief Financial Officer and Controller as it was actively engaged in the sale process. It needed two people for the short term who could work with its PE owner, the investment banker, the potential buyers, lenders and other stakeholders, and at the same time, continue to produce required financial information and to liaison with its auditors.
The PE firm reached out to CFO Consulting Partners (CFOCP) to provide an Interim CFO who could handle both the CFO and controllership responsibilities, and who could provide financial management leadership to the company during the sale process. One of CFOCP member’s was retained by the company.
During the initial phase of the engagement, the Interim CFO took total charge of the Finance Area. The Interim CFO’s direct areas of responsibility included Accounting & Finance, Information Technology, Human Resources and Legal. He was instrumental in accelerating the closing process by up to two weeks, and he enhanced the HR area by outsourcing a portion of the function. In addition, he was able to recover certain funds by investigating nuances of certain long term contracts and participated in direct negotiations of certain contracts and leases.
During the potential buyers’ due diligence processes, the Interim CFO fielded and directed all due diligence responses. He also played an active role in the Management Presentations. This posed a tremendous challenge as the sale process was not disclosed throughout the Company.
CFOCP, which specializes in providing senior-level financial management services, provided such an experienced CFO from its team. CFOCP supported the Company with various accounting and M&A services. The CFOCP member became an integral member of the management team. The needs of all stakeholders were met, and the sale was successfully completed. Subsequent to the sale, the buyer group retained the CFOCP member to assist with accounting integration, purchase price accounting and a subsequent refinancing. In addition, the CFOCP member provided valuable institutional knowledge to the buyer group.
Basel III Affects Community Banks
The final Basel III rules for US banks were issued by the bank regulators in July, 2013. These rules require all banks to maintain higher capital levels, and generally add complexity to the US regulatory capital framework. All banks will need to strategically manage to the higher capital levels.
Implementation of the new rules for Community and most other banks and bank holding companies begins January 1, 2015. Implementation for “Advanced Approaches” Banking organizations, which include all banks and bank holding Companies with $250 billion or more in consolidated assets or $10 billion or more of on-balance sheet foreign exposure, begins January 1, 2014. For all banks, there are detailed phase-in requirements in the implementation framework that need to be considered in planning and analyzing Basel III implementation.
The Final Basel III rules a) significantly increase required minimum capital ratios, b) introduce a new common equity ratio, c) create the concept of “capital buffers,” d) narrow what is permitted as capital and e) change the risk based assets calculation. The new common equity ratio is called “Common Equity Tier 1” or “CET1”. The minimum “CET1” ratio for Non-Advanced Approaches banking institutions, which include Community Banks, increases from 4.5% at January 1, 2015 to 7.0% at January 1, 2019. This calculation includes a “capital conservation buffer” which is added to the minimum ratio of CET1 to risk weighted assets of 4.5%, and is phased in from 0.0% in 2015 to 2.5% in 2019, resulting in an effective CET1 to risk weighted asset ratio of at least 7.0% in 2019.
CET1 is defined by reference to 13 criteria, but is essentially common equity with limitations on distributions. Tier 1 Capital is defined by 14 criteria, with the most common qualifying Tier 1 instrument being noncumulative perpetual preferred stock. Tier 2 Capital is defined by reference to 11 criteria, with the principal criteria being subordination to depositors and general creditors, original maturity of at least 5 years, and no credit-sensitive features. There are special rules and some phase outs for Trust Preferred Securities.
Computations for the capital ratio denominator (risk adjusted assets) are equally complex, with special rules for residential mortgages, commercial estate, corporate exposures, and securitizations.
The following are links to useful publications and analysis available from regulators and industry participants.
OCC Community Bank Guide: