Trust Preferred Security (TruPS)

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table1"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table2"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Trust Preferred Security (TruPS)</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table4"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="98%" align="left" valign="top"><p class="word_list"> <a href="#TruPS CDO">TruPS CDO</a><p class="word_list"> <a href="#Trust preferred securities">trust preferred security</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <p class="body"><b><a name="Trust preferred securities">Trust preferred securities</a></b> (TruPS) are <a href="../articles/preferred_stock.htm">cumulative preferred stock</a> issued by bank holding companies through a <a href="../articles/off_balance_sheet_finance.htm">special purpose vehicle</a>. For the issuing bank holding company, TruPS combine benefits of both debt and <a href="../articles/common_stock.htm">equity</a>.</p> <table border="0" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111" width="310" align="right" id="table5"> <tr> <td align="right" width="9"> </td> <td width="300"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table><p class="body">The special purpose vehicle is wholly owned by the bank holding company and is usually a trust. It sells the TruPS to investors and uses the proceeds to purchase a subordinated note from the bank holding company. This becomes its sole asset, and cash flows from the note largely mirror the <a href="../articles/common_stock.htm">dividends</a> payable on the TruPS. The note has an initial maturity of at least 30 years. Dividends are paid quarterly or semi-annually. Dividends may be deferred for at least five years without creating an event of default or acceleration.</p> <p class="body">From a tax standpoint, TruPS have a significant advantage over the direct issuance of <img border="0" src="../images/TruPS_word_prefrd.gif" align="absbottom" width="56" height="15"> <img border="0" src="../images/TruPS_word_shrs.gif" align="absbottom" width="36" height="15">. This is because dividends on <img border="0" src="../images/TruPS_word_prefrd.gif" align="absbottom" width="56" height="15"> <img border="0" src="../images/TruPS_word_shrs.gif" align="absbottom" width="36" height="15"> are not deductible as a business expense, but interest on a subordinated note is. In this regard, the TruPS behaves like debt. In another regard, it behaves like equity. In 1996, the <a href="../articles/united_states_financial_regulation.htm">Federal Reserve</a> ruled that up to 25% of a bank holding companies <a href="../articles/basle_committee.htm">tier 1</a> <a href="../articles/capital_allocation.htm">capital</a> may comprise TruPS or directly-issued <img border="0" src="../images/TruPS_word_prefrd.gif" align="absbottom" width="56" height="15"> <img border="0" src="../images/TruPS_word_stok.gif" align="absbottom" width="32" height="15">. In 2005, the Fed reaffirmed this treatment of TruPS after FASB modified the accounting treatment of TruPS under GAAP.</p> <p class="body">Initially, TruPS were only issued by larger bank holding companies. This changed in 2000, when several institutions issued TruPS, which were pooled in a <a href="../articles/collateralized_debt_obligation.htm">CDO</a>. Since then, the <b><a name="TruPS CDO">TruPS CDO</a></b> market has grown dramatically and has become a significant source of capital for small and medium sized bank holding companies.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table6"> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table7"> <tr> <td width="100%"> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/basle_committee.htm">Basel Committee</a> A committee of representatives from central banks and regulatory 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class="explanatory_text">Batchvarov (<a target="_blank" href="http://www.riskbook.com/link/batchvarov_a_(2005).htm">2005</a>) is an edited collection with a chapter on TruPS.</p> <table border="0" cellpadding="4" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table9"> <tr> <td width="100" align="left" valign="top"> <map name="FPMap523"> <area target="_blank" coords="0, 0, 82, 124" shape="rect" href="http://www.riskbook.com/link/batchvarov_a_(2005).htm"> </map> <img border="0" src="../images/book_batchvarov_a_(2005)_125.gif" usemap="#FPMap523" width="83" height="125"></td> <td align="left" valign="top"> <table border="0" cellpadding="1" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table10"> <tr> <td width="90%" colspan="3"> <p class="title"> <a target="_blank" href="http://www.riskbook.com/link/batchvarov_a_(2005).htm"> Hybrid Products</a></td> </tr> <tr> <td colspan="3"> <p class="author"><b>Alexander 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