More than 100 less than happy Butterfield Bank shareholders yesterday gave the go-ahead for a $200 million capital raise through the sale of preference shares guaranteed by the Bermuda Government.

The plan, designed to give the bank a "capital cushion" to ensure it can withstand a severe economic downturn, was approved by shareholders at a special general meeting at the Fairmont Hamilton Princess.

Non-shareholder media representatives were not allowed into the meeting. But according to one source who was there, chairman Robert Mulderig and chief executive officer Alan Thompson fielded multiple questions from shareholders unhappy at the plunging value of their shareholdings and the cut in dividends.

The value of Butterfield shares has plummeted over the past year. On February 20, 2008, the stock was at $18.82. Since then it has fallen almost 79 percent to close yesterday at $4.

Quarterly dividends have also been cut, from 16 cents a share to four cents.

One attendee said the mood was "generally unhappy" and several shareholders who spoke out were concerned over the dilutive effect the Government-guaranteed preference stock would have on their common shares.

The source added that the message from the bank's leadership was the capital raise was a step that had to be taken.

The meeting was far from being a straightforward "rubber stamping" exercise, as the chairman and CEO took questions from all who wanted to speak out. The meeting stretched to beyond one and a half hours.

Buyers of the preference shares will benefit from a Government guarantee on the principal invested and the dividends earned for a period of up to 10 years under the terms approved yesterday. The stock will be offered in the US as well as in Bermuda.

Dividends will be paid quarterly at a rate per annum that is yet to be determined. The shares will go on sale by the end of June this year.

In exchange for its commitment, the Government will receive a guarantee fee of one percent per annum, as well as a 10-year warrant to buy around 4.28 million common shares at an initial exercise price of $7.01.

This will give Government an opportunity to benefit from a future rise in the bank's common share price, but could have a dilutive effect for other shareholders if the warrant is exercised.

Local analysts LOM have said they believe the preferred stock could prove to be an attractive investment. And former Premier and leading property developer Sir John Swan has already declared his intention to invest.

Last year, the bank's profits plunged to $4.8 million — compared to $146 million in 2007 — as it suffered from the impact of a fall in the value of its investments. In the fourth-quarter alone, Butterfield took a charge of $121 million related to its investments linked to US mortgages, which were hit by the slump in the American property market. Many banks around the world have had a similar problem.

The bank needed to raise capital to meet heightened standards for Tier 1 — or high-quality, immediately available capital — set by financial regulator the Bermuda Monetary Authority to ensure the stability of the Island's banks in the event of a severe economic downturn.

Shareholders were told yesterday that the bank had performed its own stress test, which came up with the same result as the BMA stress test — that $200 million of extra capital was needed.

Butterfield's initial efforts to raise capital from the private sector were unsuccessful. The bank then approached the Ministry of Finance and the result was the agreement announced early last month.