Welcome To The Camp

Since the Dodd financial regulation bill (and specifically the Collins amendment) was signed into law questions arose about when and if banks would call in their trust preferreds. One camp believed that banks would call in all of their trust preferreds as soon as possible as that form of capital made little sense for banks now that they would lose their Tier-1 capital treatment beginning 2013. Another camp believed that banks would not begin to call in trust preferreds until they actually began to lose their Tier-1 eligibility.

Then there was my camp. I thought that banks would call in trust preferreds whenever it was most economically advantageous to do so. Besides the Tier-1 aspect of trust preferreds, there is the cost of finance aspect. I was of the opinion that banks would choose to call in their highest coupon issues first and that banks are free to determine when the capital event, which is required to trigger an early call occurred. I warned readers that a bank could decide to call in a high-coupon trust preferred, not only before 2013, but at anytime.


Today, Fifth Third back called in their 8.875% FTBprC. It will be called on 6/17/11 at a price of 25. This was bad news for investors who purchased shared recently (up to this morning) at over $26.00 per share. I will warn readers once again; don’t buy high-coupon, high-premium trust preferreds thinking that the will be around until their first call dates and don’t buy low-coupon preferreds at deep discounts thinking that they will be called in the near future at par. Neither scenario is economically advantageous for issuers. Calls are always executed when it is the best interest of the issuer, not investors.