Thursday, April 29, 2010

Sterling Financial lives to fight another day. Kinda. (STSA)

The good news is that Sterling Financial (STSA) common stockholders will live to fight another day. The bad news is that the future earnings will be, um, "shared" by quite a few more stakeholders:

Tuesday, Sterling announced a "recapitalization and recovery plan" involving the injection of capital from Thomas H. Lee Partners, who describes themselves as "one of the oldest and most successful private equity investment firms in the United States."

Some of the details:
Under the terms of the agreement, THL would purchase shares of common stock and shares of a newly-created Series B convertible participating voting preferred stock at a price of up to $0.20 per share of common stock and $75.00 per share of Series B stock. The common stock and the Series B stock would represent a pro forma ownership interest of 16.6% on an as-converted basis. THL would also receive a warrant with a seven-year term to purchase 168,383,759 shares of common stock exercisable at a price of up to $0.22 per share, representing a total investment of 19.9%, on an as-converted basis and assuming the exercise of these warrants. Following the investment and subject to required regulatory approvals, THL Managing Director Scott Jaeckel would join the Sterling board of directors.
It's a bit complicated to get a clear picture of what is left for common stockholders. The company has repeatedly warned that very little will be left for that piece of the capital structure, so there was ample warning.

A company spokesman told me yesterday to assume that after full dilution, there will be about 3billion shares of common stock. So that at least lets us do some math.

With $10billion in total assets and a hugely optimistic future (clean of charge-offs) net interest margin of 3%, the company could earn about $300million or 10cents per share on 3billion shares. A PE of ten puts the shares at a dollar. This is a very rough way to look at it, but shows that there really is little possibility for the common stock to head much higher.

It's a crappy situation, brought on by horrendous lending and "hot-money" brokered deposits. Especially unfortunate for everyone is that management and employees could not legally take part in this transaction, and thus have no incentive through participation in a common stock recovery.

Copyright 2010 TheAlphaNinja

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