Trust-preferred security

Trust-preferred security

A trust-preferred security is a security possessing characteristics of both equity and debt issues. A company creates trust-preferred securities by creating a trust and issuing debt to the new entity, while the trust issues the trust preferred securities. Trust-preferred securities are generally issued by bank holding companies.

The security is a hybrid security with characteristics of both subordinated debt and preferred stock in that it is generally very long term (30 years or more), allows early redemption by the issuer, makes periodic fixed or variable interest payments, and matures at face value. In addition, trust preferred securities issued by bank holding companies will usually allow the deferral of interest payments for up to 5 years.

The principal advantages of these hybrid characteristics are favorable tax, accounting, and credit treatment. Trust preferred securities have an additional advantage over other types of hybrid securities (such as similar types of debt issued directly to investors without the intervening trust), which is that if they are issued by a bank holding company, they will be treated as capital (equity/own funds) rather than as debt for regulatory purposes. This is why trust preferred securities are issued overwhelmingly by bank holding companies, even though any company can issue them.

tructure

The issuing company forms a Delaware trust (a Connecticut trust is also not uncommon) and holds 100% of the common stock of the trust. The trust then issues preferred stock to investors. All of the proceeds from the issuance of preferred stock are paid to the company. In exchange, the company issues junior subordinated debt to the trust with essentially the same terms as the trust's preferred stock. All steps except the formation of the trust occur simultaneously. If the issuing company is a bank holding company, it will also usually guarantee the interest and maturity payments on the trust preferred stock.

Advantages

Trust preferred securities are used by bank holding companies for their favorable tax, accounting, and regulatory capital treatments. Specifically, these securities are taxed like debt obligations by the IRS, so interest payments are deductible. Dividends on preferred stock, by comparison, are paid out of after-tax income. The company may therefore enjoy a significantly lower cost of funding. If issued by a bank holding company, they are treated as capital rather than liabilities under banking regulations, and may be treated as the highest quality capital (tier 1 capital) if they have certain characteristics. Since the amount of liabilities (such as deposits) that a banking institution may have is limited to some multiple its capital, this regulatory treatment is highly favorable and is why the trust preferred structure is favored by bank holding companies. Non-financial companies are more likely to use less complex structures, such as issuing junior subordinated debt directly to the public.

Disadvantages

The principal disadvantages of trust preferred securities is cost. Because the trust preferred securities are subordinated to all of the issuer's other debt and typically have features like early redemption and optional deferral of interest payments, investors demand high interest rates. These rates will be much higher than ordinary senior debt or subordinated debt. Offering costs are high as well. Investment banks will take a large underwriting fee to sell the securities to the public, and legal and accounting fees will also be high.

ee also

*Debenture
*Preferred stock

External links

* [http://www.investopedia.com/terms/t/trustpreferredsecurity.asp Trust Preferred Securities - TruPS]
* [http://www.investorwords.com/5090/trust_preferred_security.html Trust-preferred security Definition]


Wikimedia Foundation. 2010.

Игры ⚽ Нужен реферат?

Look at other dictionaries:

  • Trust Preferred Securities - TruPS — A security similar to debentures and preferreds that is generally longer term, has early redemption features, makes quarterly fixed interest payments, and matures at face value. TruPS have been created by companies for their favorable accounting… …   Investment dictionary

  • Preferred stock — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond …   Wikipedia

  • Security interest — A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt.[1] It gives the beneficiary of the security interest certain… …   Wikipedia

  • security — se·cur·i·ty /si kyu̇r ə tē/ n pl ties 1 a: something (as a mortgage or collateral) that is provided to make certain the fulfillment of an obligation used his property as security for a loan b: surety see also …   Law dictionary

  • Security (finance) — This article is about the negotiable instrument. For the legal right given to a creditor by a borrower, see Security interest. Securities Securities Bond …   Wikipedia

  • security — /si kyoor i tee/, n., pl. securities, adj. n. 1. freedom from danger, risk, etc.; safety. 2. freedom from care, anxiety, or doubt; well founded confidence. 3. something that secures or makes safe; protection; defense. 4. freedom from financial… …   Universalium

  • security — Protection; assurance; indemnification. The term is usually applied to an obligation, pledge, mortgage, deposit, lien, etc., given by a debtor in order to assure the payment or performance of his debt, by furnishing the creditor with a resource… …   Black's law dictionary

  • Washington Mutual — Washington Mutual, Inc. Rechtsform Aktiengesellschaft Gründung 25. September 1889 Sitz …   Deutsch Wikipedia

  • Collateralized debt obligation — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond …   Wikipedia

  • List of finance topics — Topics in finance include:Fundamental financial concepts* Finance an overview ** Arbitrage ** Capital (economics) ** Capital asset pricing model ** Cash flow ** Cash flow matching ** Debt *** Default *** Consumer debt *** Debt consolidation ***… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”