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Hedge Fund Calls UCFC Plan ‘Excessive, Troubling’
YOUNGSTOWN, Ohio – A hedge fund that owns 3% of the shares in United Community Financial Corp., parent of the Home Savings and Loan Co., has written the UCFC Board of Directors to express its concern over the holding company’s plan to raise $47 million in additional capital, saying the plan is unfair to UCFC shareholders.
Tontine Financial Partners LLP, Greenwich, Conn., wrote UCFC Feb. 6 asking the board to restructure the bid to raise $47 million, calling it “excessive, beyond what is needed to meet the company’s regulatory capital requirements and reasonable and prudent business planning needs.” Less than $15 million is needed, Jeffrey L. Gerdell wrote the board.
Gerdell is managing member of Tontine Management LLC and general manager of Tontine Financial Partners LP. Tontine describes itself as “ an investment partnership specializing in the financial services sector.”
He called the plan to raise capital ”unfair to existing shareholders because it unnecessarily dilutes the existing shareholders’ ownership interests.”
While Tontine sought a response by Feb. 11, the board did not answer until Feb. 12 when it said it would respond no earlier than Feb. 28, the date of its next regular meeting. Because UCFC did not answer as quickly as Tontine asked, the hedge fund released its letter to the press, claiming the board may not be giving “adequate consideration” to shareholders’ interests.
On Jan. 15, UCFC announced its intent to raise an additional $47 million in capital to ensure that Home Savings would meet the capital requirements regulators have set and the increased levels they’re expected to set later this year as well as for “general corporate purposes.”
Tontine calls that “excessive,” saying UCFC should raise only what’s needed, a figure it put in the neighborhood of $15 million. “Based on our review of the company’s financial position, we understand that UCFC would have needed less than $15 million to increase its Tier 1 leverage capital ratio comfortably above 9.0% by March 31, as previously required by the March 2012 consent order [with the Federal Deposit Insurance Corp. and Ohio Division of Financial Institutions]. UCFC should raise only the capital needed to “reasonabl[y] cushion over the newly established target plus [the anticipated increases].”
Tontine is also critical of the mechanisms UCFC said it plans to employ to raise the $47 million, a private placement to outside investors – expected to generate $40 million – and an existing shareholders’ rights offering at $2.75 per share.
Should the goals be reached, the new outside investors would hold 29% of UCFC stock, Tontine asserts. Existing shareholders would be offered only an additional 10% in the rights offering. “This will result a significant dilution to UCFC’s existing shareholders, who will end up owning, at most, 69% of post-transaction shares,” Tontine says.
Besides saying the procedure UCFC would employ to of raise the additional capital is excessive, Tontine was critical of the ability of corporate insiders to profit from the capital-raise, which it said would unduly benefit the directors, senior officers and unnamed consultants.
Copyright 2013 The Business Journal, Youngstown, Ohio.
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