WFC Stress Test Results

[Rabbitisrich]

The prospectus addresses your question in the section devoted to cash dividend adjustments. It says that "per share fair market value", or the amount deducted from the strike in the numerator of the adjustment, is reduced by the value of the ordinary cash dividend. When you calculate the numerator for a dividend that shares the record date with a "regular" dividend, the "per share fair market value" is reduced by the ordinary cash dividend.

[Arden]

Sorry but I fail to follow. The part you are referring to is the following:

 

 

In the case of cash dividends or other distributions. If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of (x) the market price (as defined below) of our common stock on the last trading day preceding the first date on which our common stock trades regular way on the principal national securities exchange on which our common stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the fair market value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of our common stock (such subtracted amount and/or fair market value, the “per share fair market value”) divided by (y) such market price on the date specified in clause (x). Any such adjustment will be made successively whenever such a record date is fixed. The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares deliverable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence. In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the per share fair market value would be reduced only by the per share amount of the portion of the cash dividend that would constitute an ordinary cash dividend. If, after the declaration of any such record date, the related distribution is not made, the exercise price and the number of warrant shares then in effect will be readjusted, effective as of the date when our board of directors determines not to make such distribution, to the exercise price and the number of warrant shares that would then be in effect if such record date had not been fixed.

 

The highlighted sentence is one of only two mentions of mentions of the term "per share fair market value" in the prospectus, and this is the definition of the term. It seems to me it is defined as the whole dividend

 

You are referring to this:

 

“ordinary cash dividends” means a regular quarterly cash dividend on shares of our common stock out of surplus or net profits legally available therefor (determined in accordance with generally accepted accounting principles in effect from time to time). Ordinary cash dividends will not include any cash dividends paid subsequent to October 28, 2008 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.34, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

 

But again, I fail to see where it is said the per share fair market value is reduced by the regular dividend. You're sharp and know the prospectus well, so I would love it if you showed me the smoking gun.

[Rabbitisrich]

Look at the last two sentences of your first quote.

[Uccmal]

Alden,  This is my E-mail and reply from Wells Fargo with my name removed:

 

 

Thank you for your interest in Wells Fargo. You are correct and I would encourage you to review the prospectus supplement, link copied below, if you want to see exactly how the adjustment is calculated. 

 

http://www.sec.gov/Archives/edgar/data/72971/000119312510126208/d424b5.htm

 

Regards, Tanya Quinn

Wells Fargo Investor Relations

420 Montgomery Street

San Francisco, CA 94104

 

-----Original Message-----

From: Investor Relations

Sent: Tuesday, March 20, 2012 9:50 AM

To: Quinn, Tanya

Subject: FW: Warrant - strike price adjustment

 

 

 

-----Original Message-----

From:

Sent: Monday, March 19, 2012 3:57 PM

To: Investor Relations

Subject: Warrant - strike price adjustment

 

I have a quick question.  Is it correct that the strike price on the Wells Fargo tarp warrants adjusts downwards for any dividend amount in excess of 0.34 cents per quarter?

 

Thanks in advance,

 

    , Wells Shareholder

 

[meiroy]

... Is it correct that the strike price on the Wells Fargo tarp warrants adjusts downwards for any dividend amount in excess of 0.34 cents per quarter?

...

 

The language used in the question is somewhat ambiguous, I'm not saying that your understanding of the adjustment is incorrect, just that the question could be read in more than one way. Maybe it's just me.

 

Would you be so kind to get back to them with a very specific example asking if it's correct or not. Such as, current strike price is 34.01, if at some point before 2018 a regular quarterly dividend is distributed with the amount of 0.40, according to your reply the strike will be adjusted by 0.06 cents (0.40 - 0.34) and the new strike price would be 33.95. Is that correct?

 

I've also sent them an email about the "special dividend" of 7c and got a reply that there's no adjustment and that the "The warrants have a strike price of $34.01."

 

 

[Uccmal]

oh, good grief... Do it yourself.  I am satisfied with the question and the answer.  Read Francis Chou's 2010 semiannual for a second opinion.

[meiroy]

oh, good grief... Do it yourself.  I am satisfied with the question and the answer.  Read Francis Chou's 2010 semiannual for a second opinion.

 

Don't worry about it. I already read Chou's 2010 semiannual, it doesn't add anything new to the discussion.

[Arden]

Thanks uccmal, Rabbitisrich. It seems that indeed the strike is adjusted for the excess. BTW, did you send your mail to the same address I wrote above?

 

in "Chou's semiannual report" , are you referring to the latest?

http://www.choufunds.com/pdf/SemiAR11.pdf

 

If so, the relevant mention of the TARP warrant is the following: "We believe the strike price is adjusted downward for any quarterly dividend paid that exceeds a set price", so they do think it's the excess, but they don't sound too sure of themselves.

[Uccmal]

Arden, When I hit the contact us button I got a long form.  I didn't bother with it and just used the address you had at the bottom of your post above. 

[Arden]

Thanks again. I also got my reply just now:

 

 

The adjustment is made for the amount over $0.34.

 

There are two main sections of the pro supp to review….

 

§  From the second bullet point on S-23: “In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the per share fair market value would be reduced only by the per share amount of the portion of the cash dividend that would constitute an ordinary cash dividend.

 

§  The definition of “ordinary cash dividends” on page S-25

 

Guess that sums it up. Sucks, but I still think the warrants are a pretty good choice.

[meiroy]

oh, good grief... Do it yourself.  I am satisfied with the question and the answer.  Read Francis Chou's 2010 semiannual for a second opinion.

 

Don't worry about it. I already read Chou's 2010 semiannual, it doesn't add anything new to the discussion.

 

So, I asked. And the answer:"No.  there’s a formula in the prospectus that details how the new strike would be calculated.  That $.06 is just one piece of it.  The calculation is detailed on page S-23, the second bullet point."

 

There is indeed a formula included on s-23, and if it's used the deduction would possibly be far more than just the excess. Unless they are talking about a second formula. In all the emails I have seen they did not bother, or choose not to, to write exactly what it is.

 

At this point, either I do not get it or it's just plain suspicious and the vague wording on the pros. is intentional. I cannot help wonder if it's in the bank's best interest that the price on these warrants will not increase so they could buy it back and avoid the dilution in 2018.

 

I am sending another email. Apologies in advance to Uccmal :)

 

 

[Kiltacular]

So, I asked. And the answer:"No.  there’s a formula in the prospectus that details how the new strike would be calculated.  That $.06 is just one piece of it.  The calculation is detailed on page S-23, the second bullet point."

 

There is indeed a formula included on s-23, and if it's used the deduction would possibly be far more than just the excess. Unless they are talking about a second formula. In all the emails I have seen they did not bother, or choose not to, to write exactly what it is.

 

At this point, either I do not get it or it's just plain suspicious and the vague wording on the pros. is intentional. I cannot help wonder if it's in the bank's best interest that the price on these warrants will not increase so they could buy it back and avoid the dilution in 2018.

 

I am sending another email. Apologies in advance to Uccmal

 

meiroy,

 

So, I've re-read the two sections mentioned in the response you posted above. 

 

I would love to hear that if dividends paid in any quarter ever exceed $ 0.34, the warrant strike is reduced by the entire dividend rather than just the spread between $ 0.34 and the amount over $ .34, since I own a bunch of these.

 

I think the relevant languge is in the definition of ordinary cash dividends from page S-25 that I posted below.  In particular, the second sentence, which uses the phrase "to the extent".  Frankly, I had assumed (and still do) that this language has a definite meaning (already defined legally) with regard to the language used in these types of documents.  These documents were drafted and reviewed by extremely sophisticated people.  But, that doesn't mean they didn't make an oversight in their use of this language. 

 

We need someone with experience in this area -- an i-banker / lawyer used to drafting this stuff. 

 

You can imagine that there must be a definite answer.  It is either established what "to the extent" means in these types of documents or it isn't.  If it isn't, you can't expect that Wells Fargo's investor relations is going to acknowledge vaguely written langauge (if indeed the meaning of the phrase is not established) should be read in a way that hurts the company.

 

I'll say this, if indeed someone can establish that "to the extent" doesn't exclude $0.34 of any dividend in excess of that amount, these warrants are crazy cheap.  That would be great, cause I own a ton of them. 

 

So, continue your efforts and maybe someone else will chime in with knowledge of these things.  Still, I expect it won't work out for us.  If / when you look through these types of documents, one realizes that much of the meaning of the language must have established meanings for the most part, otherwise there would be lawsuits left and right over things like this.  For example, take a look at the warrant / preferred filings related to Berkshire's recent deals with GE, GS and BAC. 

 

 

From page S-25 of WFC warrant prospectus:

 

“ordinary cash dividends” means a regular quarterly cash dividend on shares of our common stock out of surplus or net profits legally available therefor (determined in accordance with generally accepted accounting principles in effect from time to time). Ordinary cash dividends will not include any cash dividends paid subsequent to October 28, 2008 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.34, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

 

 

[Rabbitisrich]

What is the confusion? It's pretty clearly laid out in the definitions of ordinary cash dividend and fair market values of securities.

[Uccmal]

lol, go to it Melroy.

 

Keep in mind that these warrants were a product of Government, and they wrote them for all the banks they created the warrants for.  Maybe a side by side comparison of the language would be helpful.

 

It is interesting that whenever I google WFC tarps warrants I come back to this board.  It is as if we are the only ones to really look at these in detail.  If WFC is trying to buy them in quickly you may be onto something.  At the very least the last holders of the warrants may be able to force upnthe price on WFC.

[Rabbitisrich]

Yeah, the prospectus is not vague on this point regarding cash dividends. It explicitly guides readers through the ordinary dividend impact of the numerator of the strike adjustment multiple.

 

 

If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point)

 

such subtracted amount and/or fair market value, the “per share fair market value”

In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the per share fair market value would be reduced only by the per share amount of the portion of the cash dividend that would constitute an ordinary cash dividend.

  “ordinary cash dividends” means a regular quarterly cash dividend on shares of our common stock out of surplus or net profits legally available therefor (determined in accordance with generally accepted accounting principles in effect from time to time). Ordinary cash dividends will not include any cash dividends paid subsequent to October 28, 2008 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.34, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

 

Where is the ambiguity? To the extent that regular dividends don't exceed $0.34, the strike adjustment multiple is 1.

[Kiltacular]

Al,

 

Wells Fargo bought back almost 70% of the TARP warrants when they were originally offered by the Treasury.

 

http://www.stockbloghub.com/2010/05/24/wfc-wells-fargo-warrants-sold-by-u-s-treasury/38144

 

 

Rabbit,

 

Frankly, I don't think there is any question that the language means it is only the amount above $0.34.  But, I kind of like the enterprising attitude of arden and meiroy.  When you read it carefully, the language is not crystal clear -- to a laymen -- that when the amount exceeds $0.34 in a quarter, it is only the excess above that amount.  In other words, its written such that one could interpret is like an on/off valve.  If a dividend in a quarter is below $0.34, no adjustment to the warrant / If a dividend exceeds $0.34 in a quarter, warrant adjusted for entire dividend.

 

Still, as I said, I'm guessing (certain) that only the excess over $0.34 will reduce the strike and that there is no special benefit here.  But, if they made this stuff clear enough so that you didn't need someone expert in the area to tell you what the law says about the meaning of the words in this context, a lot of lawyers would be out of work.  ;)

 

[meiroy]

 

Rabbitisrich,

 

When the dividend equals 0.34 or is below that number it's very clear the adjustment is not triggered. My emails are for what happens when it passes this number.

[Rabbitisrich]

Nevermind, I just got the ambiguity. Your interpretation includes the possibility that the ordinary dividend definition reverts to a simple regular dividend as soon as cumulative dividends pass $0.34 in a quarter. In other words, all it takes is one quarter at $0.35, and all future dividends, of any size, adjust the strike and shares issuable.

 

Another source of ambiguity results from the terminologies, "in" and "any" If the ordinary dividend definition is knocked out after outlaying $0.34 "in" "any" quarter, that could mean that cumulative dividends are measured from ALL quarters subsequent to 10/28/10. Certainly, $0.10 from 1Q10 and $0.10 from 2Q10 sum to $0.20 from quarters.

 

One challenge to this interpretation might be in the definition of "would" from "would constitute and ordinary dividend." Unfortunately, the environment from which "would" is drawn has not been explicitly defined. Would, as if $0.34 had not been breached? If not, then why doesn't the prospectus simply say "does" to show that the ordinary dividend definition still exists and applies?

 

[meiroy]

Nevermind, I just got the ambiguity. Your interpretation includes the possibility that the ordinary dividend definition reverts to a simple regular dividend as soon as cumulative dividends pass $0.34 in a quarter. In other words, all it takes is one quarter at $0.35, and all future dividends, of any size, adjust the strike and shares issuable.

 

Another source of ambiguity results from the terminologies, "in" and "any" If the ordinary dividend definition is knocked out after outlaying $0.34 "in" "any" quarter, that could mean that cumulative dividends are measured from ALL quarters subsequent to 10/28/10. Certainly, $0.10 from 1Q10 and $0.10 from 2Q10 sum to $0.20 from quarters.

 

One challenge to this interpretation might be in the definition of "would" from "would constitute and ordinary dividend." Unfortunately, the environment from which "would" is drawn has not been explicitly defined. Would, as if $0.34 had not been breached? If not, then why doesn't the prospectus simply say "does" to show that the ordinary dividend definition still exists and applies?

 

No, that's not at all what I was thinking about. I do not think that one cash dividend beyond 0.34 would render all future dividends as you wrote. Not at all.

 

The thing I found in the language used in the emails received and some other sources including here, is that it could seem that an excess over 0.34 TRIGGERS the formula on page s23, and not that necessarily that's exactly the reduction like someone wrote in this thread that 0.35-0.34 = 0.01 reduction. That is, the 0.35 would TRIGGER the formula and the following adjustment, but perhaps the reduction is NOT ONLY the 0.01. So, on the first email to wells I gave an example of 0.40-0.34 = 0.06 adjustment and they said no that's not correct, go read the formula on the prospectus.

 

So I wrote an example using the formula and wrote to wells asking if this is correct or not. So far they did not reply.

 

[meiroy]

 

 

Received a reply "If the dividend were $0.40 the adjustment would be $0.40 - $0.34 = $0.06.". So that's about it.

 

 

[MrB]

The formulas are basically all the same, because the banks/AIG all sat down with the same people. The language evolved in one way over the years; it became clearer. So start with the latest ones first; AIG being the best example, because it actually shows you the formula. Then look at the recent FFBCW filing, which shows the adjustments in practice. So although on the one hand the language is complex, on the other hand they do eventually spell it out...with examples of the formula...and now with a real world exercise...

[meiroy]

 

Thanks for the idea MrB.