Judge: $23 million Mercantile bank sale a close call; ruling Sept. 20

By Jim Witters

Wilmington, Del., Sept. 16 - Approval of Mercantile Bancorp, Inc.'s proposed $23.03 million sale of its interests in Mercantile Bank is a "close case" that hinges on whether perceived pressure from the Federal Deposit Insurance Corp. provided sufficient business justification for the transaction, a judge said during a Sept. 16 hearing in the U.S. Bankruptcy Court for the District of Delaware.

Judge Kevin J. Carey delayed a ruling on the sale, telling the debtor it has "reason to put something together that brings everyone into sync" before a Sept. 20 hearing.

United Community Bancorp. Inc. emerged from a Sept. 12 auction as the prevailing bidder with a purchase price of $23,027,000 for the holding company's stock in the bank and the trademarked M logo.

The sale is contingent upon the debtors or UCB obtaining a waiver from the FDIC on an estimated $23 million cross-guarantee claim related to the FDIC's seizing of Mercantile's Royal Palm Bank and Heartland Bank.

The official committee of trust preferred securities holders objects to the UCB purchase, saying that the bankruptcy code forbids a sale to appease one creditor - the FDIC - and that the sale provides no return to unsecured creditors.

The committee also said the proposed sale squanders about $30 million of net operating loss carry-forwards.

The TruPS committee asked the court to deny the sale motion or delay a decision until the debtor negotiates a settlement with the FDIC.

TruPS attorney David Seligman said a two-week delay would not harm any parties, because the UBC deal cannot close without an FDIC waiver. The asset purchase agreement calls for the sale to close by Dec. 1.

During the intervening time, the committee financial adviser can continue to work with private equity companies on an alternative transaction.

The committee tendered two non-binding letters of intent late Sept. 15 that outline a prospective restructuring of the Mercantile debt through new investment.

Tricadia Capital Management, LLC and Hildene Capital Management, LLC are discussing an aggregate investment of about $15 million in exchange for common equity of the reorganized debtor, according to Joseph M. Harenza, chief executive officer and senior managing director of Griffin Financial Group LLC, the committee's financial adviser.

The structure also calls for the holders of the trust preferred securities to exchange their debt for preferred equity of the reorganized debtor.

"This creates approximately $30 million of new capital for the debtor and eliminates approximately $76 million of debt. A portion of the $15 million investment would be used to pay the FDIC's cross guarantee claim. The debt-for-equity exchange would also preserve the debtor's tax attributes," according to Harenza.

Judge Carey said the alternative transaction outlined in the letters of intent is "too speculative."

"What ought to happen is that the debtors sit down with the committee and the buyer and work out a budget for an exit plan," Carey said.

But the judge recognized there are limits to what the buyer - whom he called "strident" - may be willing to agree to.

He gave the parties until the 2 p.m. ET Sept. 20 teleconference to reach accommodation. If no settlement emerges, Carey will issue his ruling on the sale motion.

Mercantile Bancorp, a Quincy, Ill., bank holding company, filed for bankruptcy on June 27. The Chapter 11 case number is 13-11634.

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