Another exchange deal on the horizon?

Central Pacific Financial Corp., which received $135 million in TARP aid in January 2009, could be on the verge of gaining new capital from outside investors. But the deal may affect the value of taxpayers' investment in the company.

The struggling bank holding company announced this month that The Carlyle Group and Anchorage Capital Group LLC have each agreed to invest $98 million in the company in exchange for 24.9 percent of its common stock.

Central Pacific Financial is the holding company for Central Pacific Bank, Hawaii's fourth largest bank, with 35 offices.

The move is part of a larger plan expected to raise $325 million in capital for the company from a broader group of investors, and the Carlyle Group and Anchorage deals are contingent upon the rest of that funding coming through.

"The recapitalization will significantly improve CPF's balance sheet and provide the Company with the capital necessary to address its near-term challenges and build for the longer-term," John Dean, Central Pacific's chairman, said in a statement.

But closing the two investments also is contingent upon Central Pacific "exchanging its TARP preferred stock for common stock and amending its TARP warrant on specified terms," according to the company. No further details on how the plan would affect the public's $135 million investment was available.

As BailoutSleuth has previously reported, such exchange agreements can be costly to taxpayers, and typically reduce the value of their investments in a company.

Treasury often accepts deals that reduce a bank's TARP debt if it can secure new capital. That's because if a bank's TARP obligations make it unattractive to investors, the company could collapse -- and taxpayers could lose their entire investment.

On the other hand, capital investments by outsiders don't always mean taxpayers take a hit. For example, M&T Bank Corp. will pay the entire outstanding amount of the TARP loans given to Wilmington Trust Co.'s which it recently acquired. It's unclear what type of deal will emerge in the case of Central Pacific.

The deal is expected to close early next year, and Central Pacific's current management will likely stay in place.

Central Pacific Bank has a worst-possible "0" rating from independent bank analysts BauerFinancial and is under enforcement orders from both the Federal Reserve and the Federal Deposit Insurance Corp.

The company has failed to pay five dividend payments -- valued at more than $8.4 million -- it owed the Treasury Department as a condition of its TARP aid.

This month Central Pacific also released its third quarter report, which showed a net loss of $72.5 million for the period, compared to a loss of $183.1 million this time a year ago.

The company's non-performing assets were reduced by $94.5 million, to $372.7 million.

But, in a possible sign of more trouble for the bank, all three of its capital ratios have fallen by at least 20 percent over the last three months.

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