BBT, the nation’s ninth largest bank, announced today that it will be issuing new debt (bonds) or stock (common and/or traditional preferred) in order to generate the cash it needs to retire (call and buy back from shareholders) their existing Trust Preferred Stocks (TRUPS).
The announcement stated that BBT will do so since the 2010 Wall Street Reform Act prohibits Big Banks from counting their TRUPS toward their Tier 1 Capital reserves after January 1, 2013. Being able to count TRUPS toward this key metric is the primary reason that Big Banks issue TRUPS to begin with. Without being able to count TRUPS toward Tier 1 Capital, Big Banks have little reason not to retire these preferred stocks as their call dates arrive.
BBT's decision provides important validation of the “Big Bank Trust Preferred Stock” opportunity described in every monthly issue of the CDx3 Newsletter since July 2010.
If You Paid Less Than $25 Per Share
When (no longer IF) BBT's TRUPS are called, shareholders will receive $25.00 per share.
The Big Bank TRUPS opportunity has now come to fruition for BBT TRUPS shareholders who, as the newsletter has urged, were able to purchase shares for less than $25 each. Congratulations!
If you have taken advantage of the opportunity described in the CDx3 Newsletter each month, you are going to be adding a nice capital gain on top of the great dividend income that you have been receiving in the meantime.
If You Paid More Than $25 Per Share
The likelihood that BBT's TRUPS will be called is now 100% so expect their market prices to trend toward $25 as their call dates approach per the Rule of Call Date Gravity (Preferred Stock Investing, page 59).
If you paid more than $25 for your shares, you should start paying close attention to the market price trends of BBT's TRUPS. You may want to set a trigger in your online brokerage account to alert you when the market price falls close to your purchase price.
Timing
BBT's TRUPS are all currently trading well above $25 per share and their call dates are still over two years away.
But as these market prices trend toward $25 between now and then (and they will), be sure that you do not get caught with a capital loss situation that wipes out your dividend earnings. If you paid more than $25 per share, you are unlikely to be able to sell for a price above your purchase price once these shares fall below that point; do not count on them coming back up with a call pending.
Preferred Stock Investing stipulates that buyers should never pay more than $25 per share and this is a good example of why that's the case.
New Traditional Preferred Stocks From Big Banks?
There has been a question since I first reported the Big Bank TRUPS opportunity to you last July regarding how these Big Banks would raise the cash needed to call their TRUPS shares when the time comes.
In the July 2010 issue of the CDx3 Newsletter, I speculated in the article titled "Two Waves Of New Preferred Stocks Appear To Be Heading Our Way" that Big Banks were more likely to issue new traditional preferred stock than common stock in order to avoid diluting their common.
Another argument in favor of issuing new preferred, rather than new common, stock is that these Big Banks would not necessarily want to effectively convert non-voting TRUPS shareholders into a massive class of new voting common shareholders.
Now, it appears that we may in fact be in for a wave of new traditional preferred stocks as Big Bank TRUPS reach their call dates.
In today's Bloomberg article about BBT's plans an analyst states that BBT "...will likely issue debt or preferred stock" rather than common stock.
On the CDx3 Notification Service website (my preferred stock research and newsletter service) there is a "Hot List" link that, when clicked, generates a list of the highest quality Big Bank TRUPS that are currently available for a price less than $25.00 per share (take tour). The average annual dividend yield of the current list is 7.03%. And that's before counting any downstream capital gain in the event of a call (which is extremely likely as BBT has just demonstrated).
To take advantage of the remaining opportunity that the 2010 Wall Street Reform Act created for preferred stock investors, please consider subscribing to the CDx3 Notification Service.
Many Happy Returns.
Friday, April 22, 2011
BB&T Trust Preferred Stock Shareholders - Start Paying Attention
2 - Click To Post Comments:
Are we sure BBT won't redeem their TRUPS in the same matter FITB did? FITB is redeeming their TRUPS prior to the call date thru some method I do not understand. How can FITB redemm their shares before the call date?
These banks issued these TRUPS years ago in order to boost their Tier 1 Capital reserve metric. The prospectuses of most such securities have always included a provision saying that if the government changes the formula for Tier 1 Capital they, the issuers, have the right to prematurely call the security. The Wall Street Reform Act signed last year did just that - changed the formula, so Comerica and now FITB have prematurely called two TRUPS issues (these are the only two that have done so). Normally, the issuer has 90 days from the change to do so. There is a debate as to when that 90 day timer starts in this case since the Act, while changing the Tier 1 formula, does not become effective until January 1, 2011. Unless the prospectus allows them to do otherwise (which FTB-C's did), issuers now must wait until January 1, 2013 to use this 90-day provision (if at all).
I know it is confusing, but FITB was within their rights to prematurely call FTB-C yesterday (the call will happen June 15, 2011) since the government changed the formulat after the security was issued. The extent to which BBT pursues this strategy is unknowable although a review of the related prospectuses (look under something like 'Capital Treatment Event') would tell you.
Many Happy Returns.
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