Arkansas Banks Take Advantage of Low Rates on Subordinated Debt

October 27, 2020

By Robert T. Smith and Madeline O. McElhanon

With interest rates remaining historically low, a number of Arkansas banks have taken steps to secure an additional capital cushion through a subordinated debt offering. As reported earlier this year by American Banker, the pandemic has incentivized institutions to shore up capital as a protection against credit losses, as well as preparing to take advantage of potential lending and M&A opportunities. 

Subordinated debt is typically raised at the holding company level with funds then pushed down to the bank as Tier 1 capital. To qualify as Tier 2 capital at the holding company, the debt must satisfy certain requirements. These include that the instrument is subordinated to depositors and general creditors, is not secured, and has a minimum original maturity of at least 5 years.

A survey of recent offerings around the US provides a few notable data points. Of those that we reviewed where the issuer’s total assets were less than $2 billion, the average offering size was slightly above $20 million, with an initial fixed interest rate (for 5 years) ranging from a low of 4.375 percent to a high of 6.25 percent. Rates after the initial 5-year period were tied to 3-month SOFR, with an additional margin spread ranging from 438 basis points to 600 basis points.   

Subordinated debt is often a good fit for an institution to refinance existing debt at a lower rate or simply provide additional capital support in uncertain times. Subordinated debt is also not dilutive and represents a cheaper form of capital than a direct offering of common stock. 

We have been fortunate to assist a number of banks through the process of a subordinated debt offering, as well as assisting on other equity raises. Please contact one of our attorneys listed above if you have questions regarding this process and opportunity. 

Robert T. Smith heads the Finance and Commercial Transactions Practice Group and serves on the firm’s Management Committee. In the banking area, Robert advises clients on merger and acquisition transactions, lending, regulatory compliance and capital raising activities. He assists clients in private equity and corporate finance matters, the offering of debt and equity securities, and counseling directors and executive officers regarding fiduciary duties and corporate governance issues.

Madeline O. McElhanon is an associate in the Finance & Commercial Transactions Practice Group where she advises banking and other corporate clients on transactional, tax, securities and regulatory matters. Madeline assists clients on a variety of corporate and commercial finance needs and helps create strategies to effectively safeguard their interests.

Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.