Twisting By The Pool

"Yeah Dancing to The Euro-beat. Yeah Gonna be so cool. Twisting by the- Twisting by the -Twisting by the pool" - Dire Straits.

They are dancing in Europe. Just weeks after criticizing the U.S. for considering a rescue plan, European governments have been forced to bail out venerable firms such as B&B in the UK and Fortis and Dexia in the Netherlands and Belgium. Since other banks, such as the Royal Bank of Scotland and Deutsche Bank also have exposure to toxic assets, more help may be on the way. In fact, this afternoon Bloomberg News reported that German Chancellor Angela Merkel and British Prime Minister Gordon Brown were advocating action to help the Euro financial system. On the news, preferred securities issued by European financial institutions rallied significantly. Further proof that decoupling is a myth.


On another note, I have always been of the opinion that the kind of preferred structure one invests in did not matter much. The reasoning was that companies did not suspend dividends unless they were teetering on bankruptcy, in a bankruptcy preferred holders receive little if any recovery, regardless of class and when companies are taken over all securities are usually either bought by the new owner or it assumes the obligations. Recent developments, beginning (if not caused by) Freddie and Fannie preferreds have made it clear that structures do matter.

Because of this, I suggest that investors looking to invest in the preferred market should consider cumulative trust preferred structures, but not because they are cumulative. It is because of their debt component. As we have seen in recent deals, such as Wachovia, trust preferreds have been treated as very subordinate debt and have been assumed by the acquiring company. Why take chance for 100 basis points?