Comerica’s TruPS Plan May Trigger Redemption Wave

Comerica Inc.’s plan to retire trust-preferred securities early may save the lender millions of dollars on interest payments and trigger a wave of similar redemptions by U.S. banks.

Comerica, the Dallas-based bank that caters to businesses, plans to redeem $500 million of TruPS at face value, saying that the recently enacted Dodd-Frank Act no longer allows lenders to count them as regulatory capital, according to a Sept. 1 statement. Banks including JPMorgan Chase & Co. and Citigroup Inc. may soon stage similar buybacks, lawyers said.

The early redemption could be a blow to owners of TruPS, which often carried interest rates higher than other debt securities. Paying off TruPS before they mature deprives investors of future income and compels them to reinvest elsewhere at today’s lower rates. Almost 1,400 U.S. lenders issued $149 billion of the securities by the end of 2008, according to the Federal Reserve Bank of Philadelphia.

“Comerica is being viewed by some as a test case,” said Kevin Petrasic, a lawyer at Paul, Hastings, Janofsky & Walker LLP in Washington and former special counsel at the Office of Thrift Supervision. “I would be surprised if there isn’t a wave” of redemptions in coming months, he said.

TruPS combine characteristics of debt and equity. Issuers have included banks, which were able to count the notes as capital and the interest payments as tax deductions. Comerica’s TruPS were scheduled to circulate until 2037, with an annual interest payment of 6.576 percent.

Capital Change

Instead, Comerica has become the first bank to use passage of the financial overhaul as a reason to declare a “capital treatment event,” according to Chip MacDonald, a partner at law firm Jones Day in Atlanta. Terms of the TruPS say the lender has 90 days after a change or “announced proposed change” in capital rules to call the securities at 100 cents on the dollar, McDonald said, citing a Feb. 21, 2007, filing by Comerica.

The Dodd-Frank law enacted in July bars the TruPS from being counted as Tier 1 capital and gives banks with assets of more than $15 billion until 2016 to replace TruPS with common stock or other securities. TruPS count as 100 percent capital up to a certain amount until the end of 2012, when a phase-out period will begin.

“It is no longer an effective form of equity capital for us,” Chief Executive Officer Ralph W. Babb Jr. said in the statement. Comerica said it would take a related charge of $4.7 million in the fourth quarter.

Banks May Follow

Comerica ranks 15th among U.S. commercial lenders and thrifts with $55.9 billion in assets. The bank had $6.4 billion of Tier 1 capital at the end of June, according to Bloomberg data. The stock has advanced 25 percent this year, closing at $36.93 last week on the New York Stock Exchange.

“Many more large banks will follow this strategy,” said Brett Jefferson, founder and chief investment officer of New York-based Hildene Capital Management LLC, which oversees about $200 million in TruPS. “They should take advantage of the current low interest-rate environment.”

JPMorgan had more than $21 billion of TruPS at the end of June, according to company filings. Wells Fargo & Co. has about $12 billion covered by the Dodd-Frank regulations, Chief Financial Officer Howard Atkins said on the company’s second-quarter conference call.

Investors including Phil Jacoby, senior portfolio manager at Spectrum Asset Management, say Comerica may have acted too soon.

Starting the Clock

“The company cannot arbitrarily choose when the 90-day clock starts,” said Jacoby, who oversees more than $10 billion of preferred securities and doesn’t own the Comerica TruPS. “This has material implications on the broad market.”

The period should start in 2012, when the banks are closer to having to discount TruPS as capital, or in May when the measure was first proposed in the U.S. Senate’s version of the bill, he said. Comerica saves about $33 million in interest through 2012 by calling the TruPS, according to Jacoby.

“The decision to redeem the trust preferred securities at this time was supported by the terms of the issue,” Comerica spokesman Wayne Mielke said in an e-mailed statement.

Mary Eshet, a spokeswoman for Wells Fargo, JPMorgan spokeswoman Jennifer Zuccarelli, Jon Diat of Citigroup and Bank of America Corp.’s Scott Silvestri declined to comment. Bank of America, based in Charlotte, North Carolina, is the biggest U.S. lender.

MacDonald, who said he’s written the language for many security indentures, said there may be as many as six or seven different dates that could serve as trigger events, depending on how each banks’ indentures are written and the interpretation of management and regulators.

Capital One Financial Corp. Chief Financial Officer Gary Perlin said the McLean, Virginia-based bank and credit-card company will wait for more clarity on the coming regulations before it decides to redeem any of its $3.5 billion in TruPS. A decision will come “at or near the beginning of the phase-in period,” Perlin said July 22 on the company’s second-quarter earnings call.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE