Trust-Preferred Securities Cliff Approaches
As a number of financial institutions begin to emerge from the downturn that began in 2008, others that have deferred interest payments under their trust preferred securities (TRUPS) are fast approaching another potential impasse.
Issuers of TRUPS generally are allowed under the terms such instruments to defer interest payments for up to five years without triggering a default. Because a number of banks began deferring interest payments shortly after the 2008 downturn, they now face difficult decisions regarding how to address circumstances that could result in a holding company’s default under its TRUPS instruments.
Many of the banks in deferral are subject to enforcement actions that would prohibit payments to bring TRUPS current. Generally, such payments would violate the standard terms of Federal Reserve orders, not to mention bank-level orders that restrict dividend payments, which typically are necessary to fund holding-company level payments. Although regulators may find reasons to permit BHC-level assets to be used to bring TRUPS current in the coming months, we have yet to see regulatory authorization for such payments, and few BHCs otherwise have ready access to liquid assets that are sufficient to bring the deferred interest payments current.
While there has been much discussion in the industry of utilizing Section 363 bankruptcy sales to relieve subsidiary banks of potentially insurmountable TRUPS burdens, the substantial costs associated with such proceedings coupled with the need to identify a stalking horse willing to facilitate such deals have proven very difficult to execute. Because of the difficulties encountered by the handful of transactions to date that have used this approach, there does not appear to be a great deal of interest in pursuing such transactions.
That begs the question of what next for holding companies with TRUPS that are in deferral. We see a few possibilities:
- The bank holding company may seek to bring its deferred interest payments current. Once the TRUPS have been brought current, the issuer normally can commence another five-year deferral period, thus “restarting the clock.” However, this option requires either new capital or liquid assets, both of which are difficult for bank holding companies to generate at this time.
- If there is a senior debt holder that has a pledge of the bank stock, they may seek to foreclose on the bank shares, potentially leaving nothing for the TRUPS holders. We have already seen this strategy employed in a few instances, although obtaining regulatory approvals for such a change in control can prove challenging.
- If the TRUPS are not held in a pool, the issuer may be able to negotiate an extension with the TRUPS holder. However, because most TRUPS were sold in collateralized debt obligations, this probably would be the exception to the rule.
- If the TRUPS are held in a pool, the TRUPS holder may obtain a judgment and try to enforce it against the holding company and its subsidiary bank. This assumes that the trustee for the pool is authorized to take such action, which the terms of its indenture may or may not permit.
Each of these potential options is fraught with uncertainty, and the specific circumstances of each bank holding company may present other possibilities. But as TRUPS issuers are forced to bring this chapter of the banking crisis to a close, there undoubtedly will be opportunities for creative solutions.