By Paritosh Bansal

NEW YORK, Nov 24 (Reuters) - Deal advisers are searching hard for unorthodox ways to pull off mergers of healthy U.S. banks in the face of a gloomy prognosis for such transactions.
As capital raisings and auctions of failed institutions dominate the U.S. banking sector, deal advisers said it also makes sense in some cases for strong banks to buy one another.
The financial crisis, economic uncertainty and fears about asset quality have made it nearly impossible to go about doing bank deals as one would in normal times, these experts said.
So some of the country's roughly 8,200 banks and their advisers are putting on their creative hats to come up with deals that can account for factors such as future losses in a weak economy and doubts about a target's assets.
These structures could involve separating out bad assets, fixing payouts based on performance and even seeking some help from regulators.
"These are all things that are being kicked around in different forms and fashions," said Joseph Moeller, a managing director at investment bank Keefe, Bruyette & Woods. "These are theoretical things that have not been ironed out yet."
If a buyer doesn't like certain parts of the seller's loan portfolio, for instance, the deal could be structured so that the problem assets are separated out into another subsidiary, Moeller said.
The subsidiary would then become part of the deal consideration depending on how the loan portfolio worked out, Moeller said.
But he added that there are problems that need to be addressed in a situation like that: the subsidiary will have to be capitalized and someone will have to service the loans.
Valuation of assets, particularly those related to commercial real estate, is still very much a subjective process, said Rob McCarthy, a senior director in Alvarez & Marsal's transaction advisory group.
"The sellers and the buyers will take their own independent views, which are often mismatched," McCarthy said.
"I don't think the market's found itself yet as far as commercial real estate goes," he said. "That remains an impediment to pricing and structuring of deals."
Chip MacDonald, a financial institutions lawyer at Jones Day, said they had been working on some deals involving payouts depending on the performance of problem loan portfolios.
But he added that some other structures such as those where the payout is based on earnings performance or includes clawbacks for future losses on loans are harder to put together. Once the banks are merged it is more difficult to isolate and track such performance measures.
Some discussions also revolve around seeking help from regulators such as the Federal Deposit Insurance Corp for a potential deal involving an open bank.
"I don't know if the regulators are considering it," KBW's Moeller said. "But the idea would be the banks would make the pitch, 'Listen, if you don't give us some help, it is going to cost you a lot more if you let us fail.'"
MacDonald said he did not think regulators would assist in a deal for an open bank if it was not a threat to the financial system, and even then they would likely face great resistance from lawmakers and other quarters.

The difficulty of putting together unorthodox deals means there have only been few such transactions, and despite the dealmakers' best efforts, it is likely to stay that way.
"The reason they are called creative deal structures is that they are not mainstream," said a financial institutions investment banker. "Just by definition alone they are not used that often."
In one such deal over the summer, First Niagara Financial Group Inc, a small Lockport, New York-based bank, agreed to buy Harleysville National Corp for $237 million in stock.
First Niagara structured the transaction so that it can walk away if Harleysville's loan delinquencies rise above $350 million before the deal closes.
If delinquencies rise to $238 million, the exchange ratio of First Niagara shares for each Harleysville share will drop to 0.47 from 0.474.
Moreover, if mark-downs on loans go up to 9.4 percent, the exchange ratio will come down further to 0.30.
These deals are also rare because a better alternative exists -- the abundant supply of failed bank auctions by the FDIC, where the buyer gets a clean balance sheet and loss protection.
"There is very little incentive for somebody to do open bank deals generally," MacDonald said. "There are exceptions to that. And there are good exceptions. But they are just not as widespread as the availability of sick banks through receivership."

(Editing by Steve Orlofsky)

(For more M&A news and our DealZone blog, go to http://www.reuters.com/deals) Keywords: DEALTALK/BANKDEALS (paritosh.bansal@thomsonreuters.com +1 646 223 6113; Reuters Messaging: paritosh.bansal.reuters.com@reuters.net)

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