Capital One Financial Corp.
) jumped on the bandwagon of companies redeeming trust preferred
securities (TruPS). The company announced that it will redeem
TruPS worth $3.65 billion. Over the last few months, many
financial institutions have been redeeming TruPS, since these
will no longer qualify for Tier 1 capital ratio calculations
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The redemption includes Capital One Capital (Series II to VI)
TruPS worth $3.5 billion, Coastal Capital Trust II valued at $10
million, North Fork Capital Trust II worth $100 million and
Reliance Capital Trust I worth $45 million. All the redemptions
will take place on January 2, 2013.
Capital One Capital (Series II to VI) TruPS and Coastal Capital
Trust II would be redeemed at 100% of the total principal amount
and will include accrued and unpaid distributions until the
redemption date. Moreover, North Fork Capital Trust II will be
redeemed at 101.9035% of the aggregate liquidation amount while
Reliance Capital Trust I would be redeemed at 102.451% of the
aggregate liquidation amount. Both will comprise accrued and
unpaid distributions until the redemption date.
Redemption of TruPS will enable Capital One to lower its interest
expenses as these securities demand higher rates compared to
others. The company's interest expenses were $1.8 billion for the
nine month ended 2012. Further, the redemption will lead to a
reduction in the company's long-term borrowings, which will go a
long way in improving its overall financials. As of September 30,
2012, Capital One's total debt stood at $38.4 billion compared
with $34.3 billion as of September 30, 2011.
Apart from Capital One, numerous other financial institutions
have been actively engaged in the redemption of TruPS. Among such
Bank of America Corporation
) redeemed TruPS worth $3.9 billion,
) $3.1 billion and
JPMorgan Chase & Co.
) $9 billion.
TruPS redemption is viewed as a positive step for the banks,
enabling them to bring down interest expenses, as these
securities demand higher rates than other securities and often
the banks replace TruPS with equity or other low-cost debt.
Further, according to the Dodd-Frank Act, banks will no longer be
able to consider these securities as regulatory capital beginning
Currently, Capital One retains a Zacks #3 Rank, which translates
into a short-term Hold recommendation. We believe that the
redemption of TruPS will be an appropriate step for the company,
leading to positive estimate revisions. This, in turn, could lead
to an improvement in the Zacks Rank. We also maintain a long term
'Neutral' recommendation on the stock.