News Column

Fitch: US TruPS CDO Investor Coordination May Raise Recoveries

June 23, 2014

NEW YORK--(BUSINESS WIRE)-- Coordination among TruPS CDO investors and legal enforcement of their TruPS claims through involuntary bankruptcies may improve the prospects for better recoveries on distressed TruPS issuers, Fitch Ratings says. If a distressed bank holding company risks facing a forced bankruptcy, its owners and managers may be more willing to agree to future out-of-court restructuring that are more favorable to TruPS holders.

With the prospect of bankruptcies resulting in significantly worse outcomes for bank managers and owners, more out-of-court settlements with better recoveries for TruPS holders are also likely.

Two involuntary bankruptcy petitions were filed in the last two months by managers of TruPS CDOs. The Chapter 11 filing against Saint Paul, Minn.-based American Bancorp was filed jointly by two managers: ATP Management LLC (Alesco Preferred Funding XV Ltd. and Alesco Preferred Funding XVI Ltd.) and Cohen & Co.Financial Management LLC, a unit of Institutional Financial Markets Inc. (Alesco Preferred Funding II Ltd.). A Chapter 7 involuntary bankruptcy petition was also filed by Trapeza Capital Management, LLC for Lakeland, GA- based FMB Bancshares, Inc. on behalf of Trapeza CDO XII, Ltd.

In both cases, the debtors had been deferring their interest payment on TruPS for longer than the maximum allowed deferral period of twenty consecutive payments. That provided a basis for involuntary bankruptcy petitions by the CDO managers. TruPS investors could see higher recoveries with American Bancorp as it is better capitalized, with a leverage ratio of 8% and total risk-based capital ratio of 14.9% (as of March 2014, according to Thomson Reuters), than FMB (leverage ratio of 0.9% and total risk-based capital ratio of 2.5%). In Fitch's view, the best outcome for TruPS holders is likely a quick sale of an operating bank subsidiary that would minimize disruptions of the bank operations.

Several obstacles have made legal options unattractive. In prior bankruptcies of TruPS issuers, the notion that TruPS CDO investors or their agents had a legal standing to represent TruPS creditors was sometimes challenged. And the legal fees involved in enforcing TruPS holders' rights in court are a significant deterrent in pursuing legal action. Finally, while trustees of underlying TruPS instruments and CDO trustees have the power to take legal action following a default, they are not obligated to do so.

However, at least one CDO trustee is taking a positive step for TruPS holders. In May, BNY Mellon informed noteholders of the CDOs from I-Preferred Term Securities and Preferred Term Securities shelves that it agreed to coordinate direction from the CDO noteholders in response to bankruptcies, five-year deferrals, defaulted recoveries and breaches of the TruPS Indentures. BNYM stated that it was informed that certain CDO holders agreed to take the lead and be responsible for providing an indemnity to BNYM, including payment of attorney's fees. Lead holders will be permitted to receive reimbursement for such fees if allowed by the CDO indenture or applicable bankruptcy law.

While there has been a rise in cures and a significant slowdown in deferrals and defaults across the Fitch-rated TruPS CDO universe, a significant balance of issuers continue to defer. Fitch estimates that $2.6 billion of currently deferring bank issuers could reach their deferral limit in the next six years. Many have written agreements with banking regulators that prohibit them from making distributions on TruPS.

Many TruPS are owned by CDOs, whose debt obligations, in turn, are owned by CDO investors. Some CDOs may have a collateral manager who acts on behalf of CDO investors but many are unmanaged. TruPS pools generally lack transparency with regards to identity of the issuers held by various CDOs, which was long a point of complaint by issuers claiming that it makes restructuring negotiations with TruPS holders impossible.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings

Alina Pak, CFA

Senior Director

U.S. Structured Finance

+1 312 368-3184

70 West Madison Street

Chicago, IL

or

Azadeh Sharif

Associate Director

U.S. Structured Finance

+1 212 908-0874

33 Whitehall Street

New York, NY

or

Rob Rowan

Senior Director

Fitch Wire

+1 212 908-9159

or

Media Relations

Sandro Scenga, New York, +1 212-908-0278

sandro.scenga@fitchratings.com

Source: Fitch Ratings


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