The U.S. Treasury has announced that it will auction 17.9 million stock warrants of SunTrust Banks Inc. (STI) on Thursday. Following the sale these warrants, which the Treasury had received in exchange for $4.85 billion bail-out money, the company will be completely freed from government intervention.
SunTrust’s warrants will be sold through modified Dutch auction. The auction includes 6,008,902 in “A” warrants (minimum bid price of $2.00) and 11,891,280 in “B” warrants (minimum bid price will be $1.05). Deutsche Bank AG (DB) and Lebenthal & Company will run the auction.
The buyers of the warrants would have the right to purchase an equal number of SunTrust shares at a fixed price – $33.70 for the “A” warrants and $44.14 for the “B” warrants, with expiry dates of December 31, 2018, and November 14, 2018, respectively.
However, both these prices are considerably higher than upper limit of the price range ($16.86–$33.14) within which SunTrust has been trading over the last 52 weeks. Yesterday, SunTrust’s closing price was $17.60.
In 2008, the Treasury had received these warrants in two tranches as a part of its investments in SunTrust through the Troubled Asset Relief Program (TARP) during the height of the financial crisis. In March 2011, SunTrust repaid the entire bailout money it had received from the government.
The Treasury is expected to rake profit from the sale of SunTrust’s warrants. Earlier in 2009 and 2010, it had earned decent profit from the warrant sales of major banks including JPMorgan Chase & Co. (JPM) and Bank of America Corporation (BAC).
The $700 billion TARP, which was initiated three years ago to rescue the nation’s financial industry, remains a success story. Under this program, as well as other programs to support the financial system, the Treasury had invested $245 billion in more than 700 banks. As of June 30, 2011, Treasury has already recovered $256 billion and will expectedly realize a profit on these programs.
While most of the major financial institutions have repaid their TARP loans in full, a lot of money is still expected to be recovered. Hence, the ultimate success of the TARP is yet to be seen. However, the estimated overall cost has been continuously falling.
Currently, SunTrust shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
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JPMORGAN CHASE (JPM): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
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