EJF Capital is marketing $333.75 million of notes backed by trust preferred securities issued by banks and insurance companies.
The deal, TruPS Financials Note Securitization 2016-1, will issue two tranches of notes: the $220.5 million senior tranche is provisionally rated Aa3 by Moody’s Investors Service and the $17 million subordinate tranche is rated Baa3. There is also a $96.25 million unrated tranche of preferred shares.
Merrill Lynch, Pierce, Fenner & Smith is the underwriter.
The notes are backed by a $339.58 million portfolio, including $158.78 million of TruPS issued by 22 banks, and $180.80 million of TruPS, surplus notes and senior notes issued by 23 small to medium sized insurance companies or their holding companies.
Such deals were common before the financial crisis, when TruPs, a debt-equity hybrid, allowed small community banks a relatively easy way to raise capital. The securities offered a range of tax benefits as well as favorable treatment under capital rules. They were pooled into collateral for bonds, providing a ready market, and banks often purchased the mezzanine tranches issued by securitization trusts.
Typically, TruPS are non-amortizing, preferred stock securities with 30-year maturities and five- or 10-year non-call periods. Pursuant to their terms, TruPS can defer interest for up to five years, without being considered in default. After the financial crisis, many community banks were forced to defer interest, and eventually defaulted.
Policymakers have since changed the way TruPs are treated under capital rules. Under the Dodd-Frank Act, the securities no longer count as Tier 1 capital. Basel III includes similar limitations. Dodd-Frank also makes it unattractive for banks to invest in TruPs CDOs.
The securities used as collateral for this deal were originally issued between 2002 and 2007 and the vast majority were originally held in nine bank and insurance TruPS CDOs that have since been redeemed. Moody’s presale report does not speak to the performance of the securities, except to say that all are beyond their non-call periods.
It cited as a risk the fact that the portfolio is moderately concentrated both by state and by individual asset size. Almost 13% of the portfolio assets are located in four states (including Texas, the state with the largest bank exposure), which have high exposure to the oil and gas industry. In addition, 18 issuers each constitute between 2.9% and 3.0% of the portfolio par.
The deal will be managed by TFINS Manager, an affiliate of EJF Capital, an SEC-registered, employee-owned, alternative asset management firm founded in 2005 and headquartered in Arlington, Virginia. As of 30 June 2016, EJF manages approximately $4.5 billion of assets across a diverse group of alternative asset strategies.
On the closing date, the CDO will acquire the collateral obligations from funds and accounts managed by one or more affiliates of the manager.