Reuters: Regulatory News: New Fed rules seen triggering $30bn of TruPs redemptions

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New Fed rules seen triggering $30bn of TruPs redemptions Jun 8th 2012, 19:00 By Danielle Robinson Fri Jun 8, 2012 3:00pm EDT NEW YORK, June 8 (IFR) - New capital rules proposed by the Federal Reserve this week are expected to result in the biggest US banks redeeming at least $30 billion of Trust Preferred Securities and issuing as much as $80 billion of perpetual preferreds over the next few years. Thousands of smaller banks may struggle to get any market access at all. The Fed's long-awaited Notice of Proposed Rulemaking on Basel III guidelines confirmed, as expected, that US banks will need to phase in core Basel III capital requirements by 2019 and that TruPS will lose their status as Tier 1 starting in 2013. The NPR also bolstered expectations that non-cumulative perpetual preferred securities will be the most efficient forms of new non-common Tier 1 to replace TruPS. "We estimate banks could issue an additional $80 billion of preferreds over the next few years, creating a $135 billion market," Barclays' analysts said in a report issued on Friday. The big shock to the US banking industry, however, was that the Basel III guidelines requiring 4.5% of common tier 1, 1.5% of non-common tier 1 and total capital of 8% will be applicable to almost all of the 7,307 US banks. "We did not anticipate that all of the requirements would be quite as broadly applied, or applied as quickly to smaller banks," said Anna Pinedo, partner at law firm Morrison Foerster. Thousands of small regional banks issued TruPS in the past by pooling them into CDOs, and they have not dealt with the whole issue of replacing them before they're phased out as Tier 1 beginning January 2013. "A lot of these smaller guys are not set up to do capital markets transactions, so their access to new Tier 1 non-common capital will be constrained," added one banker who specializes in optimizing banks' capital structures. Issuing new Tier 1 preferreds in CDOs is also not an option. "I don't even want to say that C word," said the banker. REPLACING THE TRUPS The top 25 biggest banks have been preparing for the phasing out of TruPs for the past two years, with Citigroup and JPM, among others, having already flagged their intention to use the NPR's release as a capital event triggering TruPS calls. Those calls are likely to begin in July, although not all of the $90 billion-odd outstanding TruPS will be redeemed. According to Barclays, at least $34 billion of TruPs with coupons higher than 7% could be called, and a further $27 billion with coupons in the 6-7% range might also be taken out if they can be replaced by lower coupon Tier 1 or Tier II instruments. JPMorgan highlighted in a December 2011 presentation that it plans to take out $10 billion of trust preferreds upon the NPR capital treatment event. According to Barclays, Bank of America is expected to issue about $10.4 billion of new non-cumulative perpetual preferreds between now and 2016, Citigroup about $20.6 billion and JP Morgan $18.7 billion. The largest regional banks such as US Bancorp and PNC Financial will be especially sought-after issuers of new preferreds, given that they don't have the same exposure to Europe as the large Wall St firms. For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. Credit default swap guide.............. Fixed income guide...... U.S. swap spreads report............... U.S. Treasury market report............ U.S. Treasury outlook... U.S. municipal bond market report...... Link this Share this Digg this Email Reprints

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