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Another day, another proposed exchange of Preferred Stock and Trust Preferred Securities into Common Stock.

Today we cast our eye on Popular, Inc. (BPOP) which is a bank holding company in Puerto Rico, the British Virgin Islands, the Dominican Republic and the United States mainland. The bank intends to boost its Tier 1 common equity (a.k.a. Tangible Common Equity) up to $1.2 billion (up to 7.44%).

Here's what is notable in this particular exchange:

Dilution - Issue up to 390 million shares of common stock in exchange for Preferred Stock and Trust Preferred Securities. The current shares outstanding total 282 million shares. Daily average volume since Dec is 2.4mm shares - 5.6MM shares traded yesterday.

Dividend Suspension - Dividends on Common Stock and Series A and Series B Preferred Stock with be suspended. Popular "expects to continue to make distributions on its Trust Preferred Securities in accordance with their current terms, although there can be no assurance that those distributions will continue."

Consent - Popular is seeking the consent of holders of its Series A and Series B Preferred Stock in-order to issue to the U.S. Treasury shares of Senior Preferred Stock in exchange for Series C Preferred Stock held by the U.S. Treasury. The reason for the consent can be obtained from the Series A/B prospectus as follows:

Popular, Inc. may not issue shares ranking, as to dividend rights or rights on liquidation, winding up and dissolution, senior to the Series B Preferred Stock, except with the consent of the holders of at least two-thirds of the outstanding aggregate liquidation preference of the 2003 Series A Preferred Stock and of the Series B Preferred Stock.

The U.S. Treasury wants to exchange its Series C Preferred Stock which is pari to the existing public Series A and Series B Preferred Stock (both non-cumulative) for Senior Preferred Stock which will be cumulative in nature.

If those consents are not obtained, the Corporation will seek the agreement of the U.S. Treasury to exchange its Series C Preferred Stock for newly issued trust preferred securities having a distribution rate equal to the dividend rate on the Series C Preferred Stock.

If this occurs, the U.S. Treasury would become pari with Trust Preferred Securites.

Ok, the Treasury issued preferred to BPOP without understanding the language of the company's existing indentures. Now, BPOP wants to turn off the preferred (and possibly trup) dividend, but if they do, the Treasury gets turned off too!

Will the existing holders consent to their payments being stopped and making sure the Treasury gets theirs? I am strongly suggesting they will not. If they don't, the Treasury will just work around this little problem by getting a new investment.

Only in America.

Disclosure: no BPOP A or B preferreds.

Source: Popular: Preferred Exchange Favors the Treasury