EJF Capital is preparing a collateralized debt obligation backed by securities intended to help small banks and insurance companies raise capital.
The $331 million TruPS Financials Note Securitization 2017-1 recycles pre-crisis trust preferred securities, subordinated and senior notes issued by 49 community banks, as well as surplus notes issued by 11 small and medium-sized insurance companies, according to Moody’s Investors Service.
All of the securities were originally issued between 2002 and 2007 and were previously held in bank and insurance TruPS CDOs that have redeemed.
Typically, TruPS are non-amortizing, preferred stock securities with 30-year maturities and five- or 10-year non-call periods. They can defer interest for up to five years, without being considered in default. Surplus notes issued by insurance companies are a highly subordinated form of debt and have characteristics similar to insurance TruPS.
All the TruPS and surplus notes in the CDO portfolio are beyond their non-call periods, according to Moody’s Investors Service. The subordinated debt is non-deferrable.
Moody’s expects to assign an Aa3 rating to two senior tranches: one for $212 million with an assumed coupon of 230 basis points over three-month Libor and one for $40 million with an assumed coupon of 4.3%. Class A-2 pays fixed for five years, then pays floating at 3mL + 2.30
There is also a $36 million subordinate tranche with an assumed coupon of three-month Libor plus 5.9% provisionally rated Baa2. A $43.25 million tranche of preferred shares is unrated.
The noes are non callable through 2019.
Merrill Lynch, Pierce, Fenner & Smith is the underwriter.
Among Moody’s ratings considerations, thee portfolio is moderately concentrated both by state and by individual asset size. Approximately 15.3% of the portfolio assets are located in two states (including Texas, the state with the largest bank exposure), which have high exposure to the oil and gas industry. In addition, 11 issuers each constitute between 2.8% and 3.0% of the portfolio par.
The portfolio is also concentrated by issuer; it includes 11 issuers that each make up between 2.8% and 3.0% of the portfolio. That means any moderate levels of prepayments in the portfolio are likely to push the size of any one of these assets to over 3.0% relative to par. At that point, Moody’s could downgrade up to 30% of the overall portfolio to two-notch downgrade, per its methodology.
In order to comply with risk retention rules, a majority-owned affiliate of the manager will acquire and retain preferred shares in an amount equal to 5% of the aggregate fair value of all the notes and preferred shares.
