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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35365  
Subject: Bank TruPS Date: 4/21/2011 2:58 PM
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Here's an article on bank TruPS (Trust Preferreds) http://www.reuters.com/article/2011/04/21/markets-credit-idU...

I know that there has been some previous discussions on this board about the potential for calls on TruPS because of Dodd-Frank. I found this part of the article had some interesting commentary on that subject:

"A bank could have a trust preferred in its capital structure that it issued five years ago when we were in a very different environment and at a level so attractive that even if it did lose its capital treatment the bank might want to keep it as senior or subordinated debt," said Matt Basler, a co-head of FIG (Financial Institutions Group) capital markets and financing at Bank of America Merrill Lynch.

About half of the Trups are $25 par instruments, many of which were sold to retail investors and then swapped to floating rate at such low London interbank offered rate (Libor) levels that banks will want to keep them on their books as attractive long-term Tier 2 or senior debt.

"The headline coupon may not be the whole story. There could be a swap against it that provides a below market Libor-equivalent rate, which in turn makes it less expensive subordinated or senior debt funding," said McGuire.

Because retail investors didn't know how to properly price the embedded option, banks were able to sell $25 par TruPS without paying for the call. They then went and swapped the proceeds from fixed to floating, using the value of the call they essentially never had to pay for to lock in low Libor levels on the swap.


AJ
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