As part of the Troubled Asset Relief Program (TARP) the U.S. Treasury purchased preferred stock from banks. The Treasury also got common stock warrants from all the publicly traded banks in the program.
After the full redemption of preferred shares, each Bank may repurchase warrants using these procedures:
- Bank provides the Treasury with its own determination of the Fair Market Value, relying on the opinion of an appraiser
- If the Treasury objects, the Bank and Treasury meet to resolve differences
If differences are not resolved, the Appraisal Procedure is invoked, as follows:
- Both Treasury and Bank each select an appraiser, each of whom do their own valuation of the Warrants and attempt to agree
- If the two appraisers do not agree on the value, the two appraisers agree on a third appraiser
- The three valuations are averaged, rejecting wide outliers, and this average is binding on both parties
It is critical that each valuation for this purpose is backed by research that:
- Is based on arm’s-length transactions in illiquid warrants, as empirical data has great potential for resolving conflicts, while theoretical model prices are more likely to prolong disagreements (in a world of “made-to-order” opinions)
- Is specifically tailored to provide valuation discounts suitable for this purpose (valuation discounts for entities with similar financial characteristics)
- Provides ranges and tolerances around central estimates, to further enhance decision making during the negotiation process
- Is based on well-recognized models and statistical methods
579 banks received TARP money. This includes 290 publicly traded banks with still-outstanding warrants. Typical terms include:
- Ten years to expiration
- Exercise prices based on the 20-day trailing average stock price before CPP application
- Warrants for 15% of preferred shares
- Customary anti-dilution provisions date
- American options
- No voting rights
- Shelf registration and piggyback rights
Pluris is the leading warrant valuation firm in the United States.
Pluris Valuation Advisors LLC is a valuation firm headquartered in New York. We believe Pluris values more warrant positions than any other valuation firm in the United States.
Pluris combines valuation and technical accounting expertise in its development and application of valuation methodology in compliance with tax valuation standards, as well as U.S. GAAP and IFRS.
Specific assets valued include warrants and other restricted securities of public companies, auction rate securities, collateralized debt obligations, asset backed securities obligations, distressed debt, bankruptcy claims, limited partnerships, and other assets that lack liquidity. Pluris’ valuations are also used for tax purposes and litigation support.
Our proprietary LiquiStat™database enables Pluris to value even the most illiquid securities based on market data from the secondary market. Pluris’ access to professionals operating the largest secondary marketplace for illiquid warrants provides us with market “color” that cannot be captured in academic research or databases.