Trust Preferred Stock Capital Gain May Be Delivered Early

While the Wall Street Reform Act created an unprecedented opportunity for preferred stock investors to use Big Bank-issued trust preferred stocks (TRUPS) to earn a capital gain in addition to some pretty nice dividend income, that gain may be arriving sooner than anyone expected.

To be clear, this is very new research about events that are still unfolding so keep that in mind as you read this early alert (read an explanation of the unprecedented opportunity created by the Act).

Under the terms of the Act (section 171), Big Banks will no longer be able to include the value of their TRUPS in a key reserve calculation (Tier 1 Capital) starting January 1, 2013. Shareholders will receive $25.00 per share in the event that these Big Banks redeem (call) their TRUPS, so purchasing such preferred stocks for less than $25 per share today (there are several such issues available) positions investors for a nice capital gain on top of the dividend income.

To hasten these investor gains, Big Banks are now pointing out that the new math for Tier 1 Capital qualifies as a change in regulatory capital and, as such, falls under the TRUPS prospectus provisions that allow the bank to redeem these issues within 90 days.

The SEC has yet to agree to this interpretation and there is now a debate brewing as to exactly which 90 days we’re talking about since the change does not start until January 1, 2013. Under that interpretation, the “qualifying event” position is largely irrelevant to shareholders since it would not change the redemption schedule of the first-affected issues.

But if the interpretation is that Big Banks can call their TRUPS within 90 days of the Act being signed into law, which was July 21, 2010, these preferred stocks are callable right now.

For preferred stock investors who hold these Big Bank-issued TRUPS, if you originally paid less than $25 per share (which, for any such issues purchased during the Global Credit Crisis you almost certainly did), you will earn a nice capital gain on top of your above-average dividend income when these preferred stocks are called (since, upon a call, the bank is required to pay you $25.00 per share). Over the last couple of weeks, the discussion has turned to the timing of your capital gain, not whether or not you are going to get one.

So you may be seeing that capital gain sooner than you may have been expecting.

The upcoming October 2010 issue of the CDx3 Newsletter (free, sign-up) will have more to say about this, the new rules being proposed by the Basil III conference and what it all means for preferred stock investors. Look for the October issue of the free CDx3 Newsletter during the first week of October.

The list of Big Bank TRUPS that can currently be purchased for less than $25 per share (including their trading symbols) is available on page 7 of the subscriber's monthly newsletter, CDx3 Research Notes (more info).

Many Happy Returns.