Spectrum Asset Calls on Fed to Block Banks' TruPS Redemptions Until 2013

Spectrum Asset Management, which oversees more than $9.4 billion for clients including pensions and mutual funds, asked the Federal Reserve to stop banks from calling their trust-preferred securities until 2013.

Regulators should specify when banks may redeem TruPS after the Dodd-Frank Act removed the securities as a form of regulatory capital starting in 2013, said Spectrum, which specializes in preferred securities, in a statement. Lawyers said the legislation’s passage on July 21 triggered a so-called capital treatment event that opens a 90-day window permitting banks to call the securities.

“There has to be a common window based on a single event date available for all banks,” the firm wrote. The window should be closed until Jan. 1, 2013, “otherwise, any bank could arbitrarily and capriciously use any date at any time.”

Comerica Inc., the Dallas-based bank with assets of $55.9 billion, said Sept. 1 it plans to redeem $500 million of TruPS at face value, citing the legislation. The announcement, which Spectrum cited, may trigger a wave of redemptions from other banks and potentially deprive investors of future income and compel them to reinvest elsewhere at lower rates.

TruPS are securities issued after a bank-holding company sells debt to an off-balance-sheet trust, which then sells the notes. Spectrum doesn’t own Comerica’s TruPS, according to senior portfolio manager Phillip Jacoby. The firm is owned by Des Moines, Iowa-based Principal Financial Group Inc.

“We encourage the Federal Reserve to provide its regulated banks with an interpretive letter,” Spectrum wrote. Doing so would “eliminate any doubts on the permissible use of this covenant.”

The law, enacted in July, bars TruPS from being counted as Tier 1 capital and gives banks with assets of more than $15 billion until 2016 to replace the instruments with common stock or other securities. TruPS count as 100 percent capital up to a certain amount until 2013, when a phase-out period begins.

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

• LinkedIn
• Google +1
• Print
• QUEUE