State Street to raise funds to repay TARP
State Street Corp., a bank that specializes in serving institutional investors and wealthy customers, said Monday it plans to raise new funds through common stock and senior note offerings as part of an effort to repay a government loan.
State Street Corp., a bank that specializes in serving institutional investors and wealthy customers, said Monday it plans to raise new funds through common stock and senior note offerings as part of an effort to repay a government loan.
Boston-based State Street had received a $2 billion loan as part of the government’s Troubled Asset Relief Program last fall.
It said it expects to raise $1.45 billion from the stock offer alone. The bank did not disclose how much it expects to raise from the senior note offering.
Shares of State Street fell $1.61, or 4.2 percent, to $36.90 in premarket trading.
To receive approval to pay back the loan, State Street must demonstrate it can raise capital without government support. The stock and note offers would provide that evidence, while also giving the bank capital to repay the loan.
State Street was also among 19 banks that underwent the government’s “stress test,” but was found to have enough capital to handle additional losses should the economy worsen. Without having to raise new capital for reserves, State Street can instead focus on repaying the government loan.
Several financial firms that were told they have enough capital have been raising cash to repay the loans, including Capital One Financial Corp., Bank of New York Mellon Corp., U.S. Bancorp and BB&T Corp.
As part of the stress test, the Federal Reserve assumed State Street would consolidate asset-backed commercial paper conduits onto its balance sheet in 2009. The bank said it brought those conduits onto its balance sheet on Friday.
Commercial paper is short-term debt that companies issue to help cover daily operations. Amid the credit crisis, the demand for commercial paper dried up and the value of the debt declined. By adding the commercial paper conduits onto the balance sheet, State Street recorded an after-tax loss of $3.7 billion to reduce the value of the holdings. Accounting rules require the assets are priced at their current trading value.
The conduits were added to the balance sheet at a fair value of $16.6 billion, compared with a book value of $22.7 billion.
State Street said it expects the majority of those losses will eventually be reversed while it collects interest revenue as the commercial paper debt is repaid. It projects $475 million in pretax interest revenue from their repayment in 2009 alone.
The bank said it expects operating earnings to range between $4.25 per share and $4.50 per share for 2009, including the effects of the stock and note offerings and interest gained on the commercial paper. The estimate, however, does not include the $3.7 billion after-tax charge initially taken while adding the commercial paper assets to its balance sheet.
Analysts polled by Thomson Reuters, on average, forecast earnings of $3.83 per share for the year.
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