Magazine article American Banker

Analysts at Odds over Value of Trust-Preferred Securities

Magazine article American Banker

Analysts at Odds over Value of Trust-Preferred Securities

Article excerpt

As the issuance of trust-preferred securities heats up again, so has the disagreement among analysts over the value of some of the hybrid instruments.

On Tuesday, Morgan Stanley & Co. recommended that investors selectively sell "highly rated (trust preferred) securities and lock in their gains" because of tightening spreads and the high price of some of the issues.

Corporate bond strategists Krishna Memani and Rachel Muszala advised investors to buy similar securities offered by such insurance company issuers as Aon Insurance Inc. or Travelers Inc.

In the last three months, banks have issued more than $18 billion worth of trust-preferred securities because they are the cheapest way to raise regulatory capital. Proceeds of the securities are tax deductible and can be applied as Tier 1 capital.

Investors initially clamored for the securities because of runaway yields. However, spreads have narrowed as a result of oversupply and aggressive pricing on the part of underwriters, analysts said.

Market observers noted that First Union's $250 issue, which came to market on Monday, was initially priced at 104 basis points over comparable Treasuries, but had since widened to 115 over Treasuries by midday.

A Compass Bancshares $250 million issue, which came out on Tuesday, started out at 139 basis points over comparable Treasuries but is expected to widen.

Mr. Memani and Ms. Muszala argued that many of the higher-rated public issues trade at a premium because of the 10-year call options offered on most of the securities, which mature in 30 years if the option is not exercised.

Banks are likely to exercise the options because the Treasury probably will change the tax deductibility of the securities, Mr. Memani and Ms. Muszala wrote, and upcoming legislation may eliminate it.

Either scenario could force banks to turn to more expensive refinancing, such as issuing dividend-received deductions, preferred securities, or 20- year capital securities. …

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