Banks Find New Non-Dilutive Way To Raise Cash

Banks may have found a new way to boost their still fragile balance sheets - warrants.

According to analysts at Goldman Sachs, warrants might become a method for regional banks to supplement capital raises. The timing could be ideal as investor pay more for warrants when volatility is high and dilution is only taken if the stock appreciates materially.

Last week, regional bank player Zions Bancorporation (Nasdaq: ZION) sold 21.1 warrants at $8.3028 per warrant. The warrants have an exercise price of $36.63 and an expiration date of May 22, 2020. The warrants are currently trading on the Nasdaq under the symbol (Nasdaq: ZIONW).

Goldman explains that the Zion warrants are not dilutive at all until the stock is up 50%, and only become as dilutive as a straight equity issuance if the stock more than doubles.

The firm also notes that the $3.5 billion in TARP warrants has created a market for bank warrants. There is also another $4 billion of TARP warrants coming in the future. Covert arbs, volatility traders and mutual fund are now involved in the market as buyers of the bank warrants.

Warrants may be better than convertible preferred securities because convertibles require a coupon payment, the firm notes.

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