08/12/2011

Lender’s Metamorphosis to Rely on ABS

It looks like securitization will play a key role in plans by small-business lender Main Street Bank to avoid regulation by ripping up its bank charter.

The company, which is reorganizing under the banner Ascentium Capital, is aiming for next year to float a Rule-144A securitization of undisclosed size. The deal would be the first in a routine series of similar offerings.

Word got out this week that Main Street, led by Tom Depping, was aiming to shutter its banking operations late this year in an attempt to escape increasingly stringent government controls on banks. As part of the effort, the Kingwood, Texas, bank agreed to sell all four of its branches to Green Bank — essentially leaving Depping with the framework to create a non-bank small-business lender with less regulatory oversight.

Dubbed Ascentium, the new operation is forming with a $75 million equity injection from Paul Allen’s Vulcan Capital and Luther King Asset Management. UBS is kicking in a $250 million warehouse line, which Depping will use to accumulate loans until his shop is ready to securitize.

The arrangements contrast with Depping’s approach at Main Street, which funded its business with FDIC-insured deposits. However, Ascentium would share its predecessor’s lending focus: writing loans to a range of small businesses nationwide, mostly to finance purchases of equipment that would serve as collateral for the accounts.

Ascentium is set to take over $150 million of such loans from Main Street. Green Bank would get the rest of the bank’s portfolio — mostly auto loans — amounting to $10 million.

Ultimately, Ascentium sees itself running a $500 million book of loans. The outfit would closely resemble First Sierra Financial, a small-business lender Depping founded in 1994. By the time it was purchased by American Express in 2001, First Sierra had completed nine securitizations totaling $1.6 billion, according to Asset-Backed Alert’s ABS Database.

Many of First Sierra’s former executives reassembled under Depping when he led a buyout of Main Street in 2004. But the bank began to come under regulatory pressure in 2009, when the FDIC instructed it to increase its reserve capital and diversify its holdings — 90% of which consisted of its small-business loans. The insurer also ousted Depping as chief executive, although he remained in place as chairman.

Frustrated with the intervention, Depping has pointed out that Main Street’s loans have enjoyed low defaults and that the company’s focus on equipment lending helped insulate it from mortgage-related losses that caused many other banks to fail in recent years.

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