NEW YORK (TheStreet) -- Now that the finreg battle over trust-preferred securities has been won, a new TruPS topic has emerged in Wall Street discourse: Buying them.
TruPS were targeted by
Sen. Susan Collins (R., Maine) as part of the broader Dodd-Frank bill to overhaul financial regulation. Collins aligned with FDIC Chairwoman Sheila Bair in deeming the securities to be an unworthy measurement of banks' top-tier capital.
But her proposal to exclude TruPS from capital measurements threatened to sap $129 billion from the collective U.S. bank balance sheet.
An analysis by
Phil van Doorn determined that large regional banks
, as well as Puerto Rico-based lender
, were the most at-risk.
But the Collins measure also threatened to put dozens of small, community banks in jeopardy -- something that wouldn't garner great headlines for someone trying to look tough on Wall Street firms. And, thus, it was watered down dramatically.
As a result, small banks with less than $15 billion in assets can continue to use TruPS. Big banks have about half a decade to phase them out. A report Tuesday from independent debt research firm CreditSights indicates that some of the "hybrid" securities may be trading at attractive values with startlingly high yields. TruPS are officially debt, but are similar to equities and stand somewhere between senior debt and ordinary stock in the capital structure.
"Many junior capital instruments have current yields north of 8%, which is a tantalizing yield in this low interest rate environment," said CreditSights analysts. "Furthermore, if bank yields were to tighten from their current levels, we believe that many of these instruments could outperform senior debt."
For instance, certain trust preferreds linked to
Bank of America's
unit offer a yield of 7.5% and are trading at $21.60 -- 14% below par value. CreditSights notes, however, that not all of the securities are so attractively priced or offering such "tantalizing" yields. Some of
TruPS offer a 7.4% yield, but are trading at $27.01, a premium of 8% to par value.
Overall, the CreditSights team considers
8.875% coupon to be the "most attractive regional yield play" with regard to TruPS.
8.5% note and Zions' 8.0% note were also deemed to be worthwhile.
CreditSights also points out that some ordinary preferred securities appear to be trading at a discount with rich yields as well. Yet some investors and issuers prefer TruPS because ordinary preferreds aren't tax deductible the way debt instruments are. They're also more expensive for banks to issue.
Additionally, many investors got burned during the crisis, seeing tons of preferred shares wiped out while senior debt retained more protection. This was a particularly contentious issue when it came to
. The government's decision to put the firms into conservatorship without protecting preferred shares depleted individual investors' savings and drained capital from bank balance sheets as well.
Risks persist. TruPS maintain their place in the capital structure, above ordinary stock and below senior debt. But does anyone believe that the country's largest banks are at the brink of failure any longer?
The resolution process outlined in the financial reform bill essentially deems them "too big to fail." Even
American International Group
and Citigroup stock is deemed by some to be
a viable investment again.
working through credit problems look
more ripe for M&A than failure. Small banks with potential
may become targets of buyout deals.
Thanks to alterations to Collins' reform measure, small banks can also continue to raise capital by offering more trust preferreds. And there are 77 months between now and the end of a "phase-out" period for investors to sniff out opportunities in the TruPS market for bigger banks.
-- Written by Lauren Tara LaCapra in New York
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.