Few investment banks know the trust-preferred securities market as well as FTN Midwest Securities Corp. Since 2001, the First Horizon National Corp. unit has structured more than 30 pooled trust-preferred deals, raising $22 billion for hundreds of banks and thrifts.

But the securities have lost much of their luster and value in the last year, so now, after years spent trying to round up buyers, several longtime FTN employees have launched a Nashville venture, Wolf River Capital, that is looking to take the shares off investors' hands.

Jeff Davis, former managing director of research for FTN and now one of Wolf River's seven principals, said bonds backed by pools of trust-preferred securities have been selling at "very distressed levels" since the mortgage crisis hit and securities in general fell out of favor with investors. However, many of the banks and thrifts that issued the securities are fundamentally strong, he said, and Wolf River will use its experience in structuring pooled deals, as well as his 20 years of bank research, to determine which ones have the most potential.

"The hope is that the value can be unlocked," Davis said.

Wolf River is hardly the only investment firm with its eye on troubled assets these days, but industry observers say they believe it is the first to focus specifically on trust-preferred securities.
Its launch could be good news for small banks, which often invested in trust-preferred pools issued by other banks.

Michael Iannaccone, managing director for Performance Trust Capital Partners  in Chicago, said many investors have already been forced to take impairment charges on the securities as their values have declined, and some — particularly those in need of capital — might sell the securities rather than risk further writedowns.

"Some would just prefer to take their hit now," Iannaccone said.

Davis' colleagues in the venture, which is expected to be up and running this year, include Jim Wingett, who was FTN's managing director of structured finance.

The securities had emerged as a useful way for community banks to band together to raise capital. However, the market dried up last year, and now Iannaccone says even the highest-rated bonds are selling at anywhere from 30 cents to 65 cents on the dollar — if they can be sold at all.

Between 2002 and 2007, Mr. Iannaccone was involved in several pools valued at $800 million. In all, financial services firms have raised more than $46 billion through pools this decade, according to Fitch Ratings.

Demand for the securities has shrunk as investors have lost interest and many have tried to liquidate their holdings. Equally, the risk has risen as the number of bank failures has increased or banking companies suspended interest payments to improve their capital positions.
Fitch said in a research note issued last month that 38 banking companies had either defaulted on or deferred interest payments in the past year. This includes IndyMac Bancorp Inc., which had issued $361 million of the securities. Until September of last year, only 11 companies had defaulted on or deferred payments.

Jim Moss, a Fitch analyst, said the number of deferrals has increased since the note was issued, but not drastically. The report said that since banks are expected "to exhibit continued financial underperformance through the first half of 2009," there could be additional deferrals and defaults.

Moss said: "Banks are not in favor, CDOs are not in favor, and deeply subordinated debt is not in favor. So you have three things that are individually out of favor combined into one instrument; that makes it challenging."

Sanford "Sandy" Brown, the managing partner in the Dallas office of Bracewell & Giuliani, said Wolf River's plans are compelling, particularly given its leadership.

What the principals "were doing last year has been evaporated, but there is no doubt that they know this business," Brown said. "If anyone is going to be successful, it's them."

Wolf River is not expected to be the only player in this niche. Brown called trust-preferreds a "valuable asset class" and said other distressed asset funds could enter the market.

Iannaccone said he knew of a Chicago-area investor that is considering buying trust-preferred securities from investors.


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