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“Claw Back” Provision in Banks. Robin Trehan

A claw back provision in an agreement that requires something to be given back, depending on the future performance of the business and its existing portfolio. To the extent there are more losses in the loan portfolio than those reserved for and additional capital has to be contributed as a result thereof additional shares to be issued to for such capital to be infused.   Existing legacy shareholders capital will be reduced upon losses of current portfolio and so will be the ownership percentage. On the other side if there are gains, existing legacy shareholders will be given dividend.

Capital Needs

     
       

Well Capitalized

 

Well Capitalized

Adequately Capitalized

       

Tier I Leverage

Tier I/Total  Average Assets

5.00%

5.00%

Tier I Risk Based

Tier I/Total RBA

8.00%

6.00%

Total Risk Based

(Tier I+ALLL)/Total RBA

12.00%

10.00%

While doing claw back provision a good way to do it so look into the existing portfolio and breakdown of 5, 6 & 7 risk rated loans and see what % of loans are under category. Look into general versus specific reserve. Also one of the things to look at especially in case of distressed situation should be what will be the Capital less intangibles on day of closing or Tier 1 capital. How much more write downs is expected with 18 to 24 months periods.

Why to implement a claw back is how the loan portfolio has to be adjusted with time be it monthly, quarterly, or yearly and what formula or recordkeeping is agreed at the time of initial capital infusion.

There is no perfect way to structure a deal in the flux market. Hinters Licht führen, we are behind the light. It is really difficult to understand the loan portfolio especially when one can really determine the future of an existing portfolio.

Robin Trehan, can be reached at www.KeyFunds.com

 

 

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