Wednesday, May 13, 2009

Trust Preferred and Trust Certificate Distinguished

I think that there may be some confusion about Trust Preferred and Trust Certificates.  I view them as separate categories of bond securities.

The Trust Certificate is an instrument indicating a beneficial interest in the assets of a  Grantor Trust that contains a bond from a single issuer. Trust Certificate Links in One Post The underlying bond may be a senior bond or it could be a Trust Preferred issue like the J P Morgan TP which is the underlying bond in the Trust Certificate PYV.  But that does not make this security-PYV- a Trust Preferred. 

The Trust Preferred involves the creation of a separate legal entity by the issuer and then that entity buys junior bonds issued by the bank.  The TP stock represents an undivided beneficial interest in the bonds owned by the trust.   This is fairly common among banks.  Banks also issue regular preferred (sometimes called equity preferred) which is different from the Trust Preferred. Trust Preferred Securities: Links in One Post

If QuantumOnline wants to label the Trust Certificate as a "Third Party Trust Preferred", that is not an accurate description.  The Trust Preferred term is reserved in this post to a non-Grantor trust arrangement that involves a guarantee of an obligation of a junior bond issue of a wholly owned subsidiary. The Trust Certificate is issued by a Trust to evidence ownership of the underlying trust assets which may be either junior or senior bonds from a single issuer depending on the TC. 

All of this may not matter to anyone but me, but that is how I classify it in this post.

ADDED 5/14/09:  Now, this comment is going to be really nerdy.  The entity formed in the Trust Preferred to issue the securities is called a "Delaware Trust" in the prospectuses.  The company that set up the trust controls it (see p. s-11 of this prospectus:    BAC Capital Trust X)  For the Trust Certificate, the Trust is controlled by an independent Trustee.  In both the Trust Certificate and Trust Preferred, the investor is buying an undivided beneficial interest in the assets of the Trust, which is a single bond security.   Every Trust Preferred security within my sphere of knowledge contains a junior bond, the lowest in priority of debt issues, although that is not a requirement of that type of security to the best of my knowledge.  I would say that a majority of the Trust Certificates contain senior bonds, but there are many that contain as their underlying security a Trust Preferred, including all of the Trust Certificates that contain bank debt as the underlying security (J P Morgan, Goldman Sachs, Wells Fargo, etc), the Aon debt issue which is the most prominent for me non-bank TP in a TC, and a few electric utility TPs in a TC form.  Was that really nerdy?  

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