Alliance Data: Vital FDIC decision expected in October; likely to set guideline for UDFI and OCC - sources

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The decision on the Blackstone Group’s application for change of control for the Texas-based Alliance Data Systems’ industrial bank is likely to come through in October, market sources suggested. However, the Federal Deposit Insurance Corporation (FDIC) is maintaining its silence on the issue.

Although October seems to be a more realistic timeline, it is understood the FDIC ‘closed’ board meeting where banking clearance applications are usually discussed is scheduled to be held tomorrow (11 September). Yet, while the agenda of this meeting is unknown, a market source closely following this situation said Blackstone was expected to submit additional documents to the FDIC in support of transactional clearance this week prompting speculation of a pre-October clearance.

According to the SEC filings, the closing of Blackstone’s acquisition of Alliance Data is subject to the approval of the FDIC and Utah Department of Financial Institutions (UDFI) with respect to the change of control of Alliance Data’s industrial bank, filed applications in each case on 2 July, and the approval by the Office of the Comptroller of Currency (OCC) with respect to the change of control of the Alliance Data’s credit card bank, filed on 28 June.

A banking attorney said the FDIC is likely the key to banking clearance; both the UDFI and the OCC will be looking to FDIC for guidance on approving this deal.

An insider at UDFI said the decision is still pending on the application. He said it takes 30 days to analyze the application and he believes the application has not been accepted as complete yet. Once the application is complete, the 60-day clock will commence to either approve or deny the application.

Meanwhile, the FDIC insider said that a moratorium on a non-financial company owning an industrial bank, or what is referred to as an industrial loans corporation (ILC), lengthens the clearance process. He said Blackstone owns multiple businesses and, therefore, falls into a gray area, which could likely impact the clearance timeline. The moratorium was prompted by a case in 2006, in which the FDIC placed a freeze on acquisition or formation of ILCs by non-finance companies after Wal-Mart’s July 2005 application to the FDIC to open an industrial bank in Utah caused uproar. The moratorium is likely to end on 31 January 2008.

The FDIC insider said change of control applications can be cleared relatively quickly but if it is tied to an ILC it can take longer because it requires the buyer to make the determination that it is not a commercial entity but a financial entity. Blackstone, he said, will have to do the same to get the FDIC clearance. ”It is just not the holding company but you have to sift through various layers all the way to the top as some of these organizations have multiple layers of ownership to make the determination and that can take some time and slow the process down,” he added.

Once the FDIC deems the notice filing to be complete, it begins its 60-day notice period, within which it has to either accept or reject the application. The agency may extend the notice period for an additional 30 days.

The banking attorney said one of the arguments that Blackstone could make before the FDIC is that it has segmented the acquisition vehicle from the holding company to show that the acquiring company is engaged primarily in financial activity. There is no moratorium on acquisition or formation of ILCs by finance companies.

However, the shareholder said FDIC clearance should not be a hindrance for Blackstone; it needs to change the industrial bank charter to credit card. Several sources agreed that change of charter can conceivably be done. Sources said Blackstone might have wanted to ”feel the FDIC out” before making a decision to switch charters to satisfy the concerns of the regulators.

It was also said that Wal Mart made a similar argument before the FDIC that the retailer was opening an ILC to process only credit card transactions at its stores and not to operate as a bank, which did not meet with any success.

A market investor said he believes the chances of the deal getting held off until the moratorium expires in January next year is very slim. According to the SEC filings, if bank approvals are not obtained by 17 October, the merger agreement provides that Alliance Data will take certain actions with respect to the industrial bank in order to facilitate the closing of the transaction. On 14 August, Blackstone notified Alliance Data that it had determined that there is a reasonable prospect that the bank approvals will be obtained.

According to the filings, upon the receipt of the last required bank approval a 20-day marketing period will commence. As described in Alliance Data’s definitive proxy statement dated 5 July, Blackstone has received debt and equity commitments for the full amount necessary to complete the transaction.

An industry banker, however, said while investors are showing an appetite for bridge financing; that was not the case with mezzanine finance and high yield debt. According to the definitive proxy statement, the approximately USD 6.6bn in aggregate debt financing includes USD 1.8bn senior unsecured bridge loan facility and USD 410m senior subordinated unsecured bridge loan facility.

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