If you’re thinking about putting money to work in TruPS, Ed Deicke says there’s something you should know.
But before we get to that – you may be asking yourself, what's TruPS?
An acronym for Trust Preferred Securities, TruPS are something of a hybrid between bonds and preferred stocks. TruPS are generally long-term, they make periodic interest payments and they mature at face value.
And although TruPS can be issued by any company – they’re often issued by banks because banks benefit from their accounting treatment – TruPS can be included as Tier 1 capital.
Got that?
Now here’s the ‘there’s something you should know’ part.
Dodd Frank is changing the accounting rules.
“The trust preferreds according to Dodd-Frank will no longer be counted as Tier 1 capital on bank balance sheets,” explains Deicke, JHS Capital Advisors senior vice president.
“That means between 2013- 2016 banks will have to take them off the balance sheets. We like them to buy, not only because you collect a coupon – but also because you will get called away.”
Why is that good – getting called away? Seems strange but Deicke explains.
“Right now in fixed income we’re concerned about buying long term – because with interest rates near 0% there’s a lot of interest rate risk on anything long term. However, with this paper (since it will get called away) you’re probably not taking a lot of interest rate risk."
If this kind of investment interests you Deicke gives us a few recommendations.
“I like Goldman Sachs HJG and HJJ – both are two trust perferreds. If you want more risk BofA and Citi offer them. And I’d be careful of JPMorgan. I think the credit is very good but it can trade at a premium to par value and if it’s called away, you’d have negative returns.”
