EJF Capital will be marketing its second collateralized debt obligation of the year, selling securities that are backed by legacy trusted preferred securities (TruPS) as well as subordinated-debt and surplus/senior notes issued by community banks and insurance companies.
According to a report from Moody's Investors Service, the $175.9 CDO securities offering (sponsored by an affiliate of Arlington, Va.-based EJF) will be secured by a pool of $100.7 million in subordinated debt, $57.6 million in TruPS and $19 million in surplus and senior notes from institutions that are part of a $6.3 billion portfolio of debt-related assets managed by EJF.
The deal was registered as TruPS Financials Note Securitization 2020-2.
About $118.7 million of the TruPS and debt obligations were issued from banks, while $58.6 million originated from property/casualty insurance firms.
All of the TruPS notes are legacy debt obligations from community banks issued prior to 2007 prior to the financial crisis. While they have been out of favor with banks for the past debt, many of the securities previously issued remain outstanding since they were non-amortizing, preferred stock securities with lengthy maturities of up to 30 years and extended non-call periods of five to 10 years.
Prior to the financial crisis, TruPS were hybrid securities that bank holding companies issued through special-purpose to shore up Tier 1 core-capital ratio requirements. More than 1,800 community and regional banks issued roughly $38 billion of the securities through CDO transactions between 2000-2010,
However, the launch of the crisis brought mounting losses for TruPS as
Firms such as EJF and
Subordinated debt supports only Tier 2, non-core capital needs of banks and such notes typically have maximum maturities of 10 years (although banks are incentivized to pay off the notes usually within five years to avoid paying higher rates of returns to investors after year 5).
The surplus notes from insurance companies also included in the pool carry many of the characteristics of TruPS and also considered a highly subordinated form of debt, according to Moody’s.
The capital stack for TruPS Financials Note Securitization 2020-2 includes $106.3 million in Class A-1 notes with preliminary Aa2 ratings from Moody’s and a fixed-rate coupon of 3%. A $7.1 million Class A-2 tranche is rated A3, while a $34.6 million Class B tranche is rated Ba3.
All three note classes have planned step-down rates after October 2025; however, those rates are tied to three-month Libor benchmark rates that are expected to be phased out after 2021, requiring an alternative rate.
(Moody’s notes Libor rates are a potential issue for the underlying collateral pool since it involves legacy TruPS and surplus notes that lack mechanisms to shift to an alternative base rate should Libor be discontinued).
The fixed-rate tranches bear a possible risk of a rate mismatch due to the floating-rate collateral, Moody’s cautioned.
EJF will also issue an unrated $27.9 million preferred shares tranche that will receive only residual interest and principal payments, according to Moody’s.
As a CDO, the deal will include overcollateralization and interest-coverage tests, but will have any ongoing collateral quality tests. The deal is a "static" transaction in which EJF, as manager, is not permitted to move any additional TruPS or debt collateral into the pool after closing.
EJF Capital manages four pre-2007 TruPS CDOs and eight post-2007 bank TruPS and subordinated debt CDOs.
