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
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
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
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
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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Source: Fitch Ratings
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