AmericanWest Bancorp: The Use of Section 363 Sale Process to Maximize Value and Stave Off Regulatory Seizure

The approval on Thursday, December 9, 2010 of the expedited sale under Section 363 of the Bankruptcy Code of AmericanWest Bancorp's shares in its operating bank subsidiary as part of a recapitalization of the bank confirms the utility of this approach to: (i) close otherwise impossible open-bank acquisitions, (ii) maximize value for the holding company's bankruptcy estate and (iii) avoid receivership of a financially distressed bank. The legal proceedings in this bankruptcy case answer many questions about acceptable terms and timetables for such recapitalizations, including the bidding procedures governing a "market check" for other qualified bidders and possible auction, breakup fee and the parties in interest who might object thereto.

Background and Key Points

While a potential strategic buyer and the trustees for certain rounds of trust preferred securities ("TRuPS") issued by the Debtor and an indirect holder of the TRuPS objected to slow down the sale process, the bankruptcy court ultimately approved the sale process substantially in the form agreed to by the Buyer and Debtor as being in the best interest of the Debtor and its creditors. The principal elements of the sale process in this case provide a valuable roadmap for future open-bank recapitalizations that involve similar circumstances:

• Expedited Sale Process: Within 20 days after the Debtor filed for bankruptcy protection, the bankruptcy court approved the bidding procedures for the "market check," but gave a preliminary approval four days after the filing so that notices could be promptly sent to creditors. The procedures allowed for a 30-day marketing period for the assets being sold to Buyer to seek qualified competitive bids that, in addition to paying a higher purchase price, also contained a commitment to recapitalize the operating bank with up to $200 million. If competing bids were received (which did not occur), an auction would be held. Objections and a hearing on the sale all were scheduled to occur within the first 40 days of the bankruptcy petition date. The court observed an expedited calendar knowing the bank was in jeopardy of failing — a favorable outcome for this and similar cases.
• Stalking Horse Protections: The bankruptcy court substantially approved the agreed-upon protections to the stalking horse Buyer: (i) a $1 million expense reimbursement fee (15% of the $6.5 million purchase price but under 12% of the Buyer's total investment) in the event that the bank stock was sold to another bidder, (ii) an $8 million initial overbid that would have to be paid by a competing bidder to qualify for the auction and (iii) $500,000 bidding increments for further bids at the auction. The bankruptcy court's reduction in the overbid from $8.5 million and the bidding increments from $1 million, as proposed by the agreement of the Debtor and Buyer, represented the most important concessions negotiated by the objecting creditors.
• Best and Highest Bid Flexibility for Debtor: The sale procedures permitted the Debtor great latitude with respect to selecting the highest and best offer in the event of an auction. Recognizing the regulatory issues confronting the bank, the Debtor was even authorized to submit to the bankruptcy court as the "winning" bid at the auction a bid that was not the highest, so long as it allowed a faster closing of the sale and recapitalization. This approach could provide a big advantage to strategic buyers or a stalking horse purchaser that begins the process of seeking regulatory approval once it enters into an agreement with the holding company debtor.
• Guidance on Responses to Objecting Parties: The bankruptcy court held that the trustees for the TRuPS, but not investors in CLOs that invested in the TRuPS, had standing to object to the sale process. This finding eliminated the prospect that indirect investors could have held up the sale through litigation over the process or terms and cleared the way for the transaction. The TRuPS trustees ultimately formed an unsecured creditors' committee that negotiated with the Debtor regarding the sale process.
• Regulatory Timing was of the Essence: This case provides an example of how creative use of the bankruptcy process can be informed by the risk of regulatory seizure and allow a transaction to close while a non-bankruptcy deal would have floundered on issues of value, process and litigation. The Debtor and Buyer successfully persuaded the bankruptcy court that the sale was fair and in the best interest of all creditors because it avoided the significant risk that the Debtor's bank would be seized by regulators and creditors would receive nothing for the bank stock.

Should you like to further discuss this Alert, please contact J. Mark Fisher or Jon C. Vigano.

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