The Year of the BankTRUPsy

A bank goes under because it cannot restructure overwhelming liabilities; here at DealVector, and pretty much everywhere, that is called a bankruptcy. A bank goes under because it cannot even find the holders of its liabilities in order to begin negotiating; let’s call that a BankTRUPSy.

The Year of the BankTRUPSy may have begun.

Here is the problem. Trust Preferred (TruPs) securities were quite popular with bank issuers in the first decade of the century. What was not to like? They provided beneficial tax treatment as debt, and beneficial regulatory treatment as equity. Best of all, the TRuPs provided to the issuer an option on up to 5 years of interest deferral.

The Global Financial Crisis (for those who have suppressed it in their memory) occurred in the fall of 2008. That 5 year grace period is now just about up.

Unfortunately, many of those issued TruPs were bundled into blind-pool TruPs CDOs. Because it is hard to track down the collateral that is held by any particular TruPs CDO, many bank managers cannot find the holders of their liabilities. That is bad news for someone interested in restructuring negotiations ahead of a potential bankruptcy. Without having those parties at the table early in the process, bringing new money in to help solve the situation is almost impossible.

Now, the rubber is hitting the road. From press accounts and from some bottom up analysis we’ve seen, something like 300-400 regional banks are deferring on their TruPs or are otherwise in need of potential restructuring.

Could be a busy year trying to find those holders.