The Fed's Rules Of The Road - TruP Stop Ahead

Jun.15.12 | About: Citigroup Inc. (C)

Approximately one week ago, the Federal Reserve Board of Governors published its proposed rules for bank regulatory capital (release found here). This event did not come as a surprise to those who follow the banking industry or the preferred/hybrid markets and most of the proposals were consistent with expectations. To bank hybrid/preferred stock investors, however, the mere publication of the proposed changes ushered in a new transitional period. The proposals were, essentially, orange traffic cones directing banks and their investors into the TruP stop.

The proposal opens the door for many issuers to exercise extraordinary redemption/call provisions found in the documents of many trust preferred and other debt based hybrid securities (a "regulatory capital event" redemption).

Specifically, Tier 1 Capital will now consist of:

1. Common Equity Tier 1 Capital

  1. Common stock instruments (that satisfy specified criteria in the proposed rule) and related surplus (net of any treasury stock);
  2. Retained earnings;
  3. Accumulated other comprehensive income (AOCI); and
  4. Common equity minority interest.

2. Additional Tier 1 Capital

  1. Noncumulative perpetual preferred stock and related surplus;

Trust preferred instruments traditionally issued by certain bank holding companies will not qualify as additional Tier 1 Capital.

The Federal Reserve is, however, allowing banks to phase out the use of TruPs as Tier 1 Capital over the next six years (2019 end date). The full proposal containing the forms of capital can be found here.

As a result of the triggering of the "regulatory capital event," three firms have announced the special redemption of some of their TruPs: Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM) and SunTrust (NYSE:STI).

BottomLine: Of these three issuers, Citigroup should benefit the most from its ability to call higher coupon TruPs and replace them with lower cost capital. I also expect we will continue to see announcements of "capital calls" in the coming weeks as banks determine the economic/financial benefits of redeeming their TruPs.

The following is a breakout of the securities being called by issuer.


Issue Coupon CUSIP/Ticker Outstanding
Citigroup Capital XII (C-J) 8.50% C-J $2.3B
Citigroup Capital XXI 8.30% 173094AA1 $2.3B
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The statement:

Citi has determined, based on a legal opinion of counsel, that this notice of proposed rulemaking constitutes a "regulatory capital event" as defined under the terms of the TRUPS® and, accordingly, Citi has the contractual right to redeem the TruPS® (in whole and not in part). As a result of these redemptions, Citigroup's Tier 1 Capital is expected to decrease by approximately $4.9 billion and its Tier 1 Capital ratio is expected to decrease by approximately 50 basis points. Citigroup's Tier 1 Common capital and related Tier 1 Common ratio, under Basel I and as estimated under Basel III, will not be affected by these redemptions.

A full list of Citigroups capital securities can be found here.


Issuer Coupon CUSIP/Ticker Outstanding
JPMorgan Chase Capital XV 5.875% 46627NAA3 $92.9MM
JPMorgan Chase Capital XVII 5.850% 46627VAA5 $500MM
JPMorgan Chase Capital XVIII 6.95% 481227AA4 $750MM
JPMorgan Chase Capital XX 6.550% 48123CAA2 $910MM
JPMorgan Chase Capital XXII 6.450% 48123QAA1 $914MM
JPMorgan Chase Capital XXV 6.800% 46631VAA9 $1,500MM
JPMorgan Chase Capital XXVI 8.000% JPM-Z $1,800MM
JPMorgan Chase Capital XXVII 7.000% 48125BAA2 $1,000MM
JPMorgan Chase Capital XXVIII 7.200% JPM-B $1,500MM
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The statement:

Following the Federal Reserve's announcement on June 7, 2012 of proposed rules which will implement the phase-out of Tier 1 capital treatment for trust preferred capital securities, JPMorgan Chase & Co. announced today that each of the trusts listed below will redeem all of the issued and outstanding trust preferred capital securities identified below on July 12, 2012 pursuant to redemption provisions relating to the occurrence of a "Capital Treatment Event" (as defined in the documents governing those securities). In each case, the redemption price will be 100% of the liquidation amount of each trust preferred capital security, together with accrued and unpaid distributions to the redemption date.

A full list of JPM's capital securities can be found here.


Issue Coupon CUSIP/Ticker Outstanding
SunTrust Capital VIII 6.10% 86800YAA4 $600MM
SunTrust Capital IX (STI-Z) 7.875% STI-Z $600MM
Click to enlarge

The statement:

Under the terms of the indentures related to the Securities, both Securities contain a redemption option that could be exercised by SunTrust Banks, Inc. at any time within ninety (90) days following the occurrence of a Capital Treatment Event (as such term is defined in each related indenture). On June 7, 2012, the Board of Governors of the Federal Reserve approved in a public meeting a notice of proposed rulemaking, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which will eliminate the ability of SunTrust to treat the aggregate liquidation amount of the Securities as Tier 1 capital. Consequently, SunTrust has determined that such regulations constitute a Capital Treatment Event for purposes of the indentures and is calling the Securities pursuant to its option to do so under the terms of each indenture.

In the preferred/hybrid market, keep an eye on the coupon, stay under the special redemption radar, and keep on TruPping!

Disclosure: I am long non-mentioned Citi preferred.

Disclaimer: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.