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Bank Trust Preferreds to Outperform Bonds in 2010, Analyst Says - Bloomberg.com
Bank Trust Preferreds to Outperform Bonds in 2010, Analyst Says
By Gabrielle Coppola
Dec. 10 (Bloomberg) -- Investors should buy trust preferred securities instead of debt that is more senior in banks’ capital structure as yields tighten and the U.S. government withdraws support programs from the financial system, a Barclays Capital Plc analyst said today.
Barclays shifted its recommendation on senior bank debt to “marketweight” from “overweight” for 2010, citing shrinking yields relative to benchmark rates. Preferred securities are more attractive because they offer higher yields than senior debt, even though both are likely to be wiped out in a bank failure, according to Barclays analyst Jonathan Glionna.
“We believe the most attractive place in the capital structure, and the place where we should be adding exposure, is in the trust preferred bucket,” Glionna said on a conference call today with investors. The value in senior bank bonds is “not as compelling as it once was, and not compelling enough to justify a high-risk stance around the sector,” Glionna said.
Trust preferred securities, which have characteristics of both equity and debt, are used by financial firms to bolster capital. The hybrids rank after debt for repayment in a bankruptcy.
The average yield on bank bonds has fallen 5.41 percentage points from a high of 10.37 percentage points on March 10 to 4.96 percentage points today, the lowest since April 2005, according to Merrill Lynch & Co.’s U.S. Corporates, Banks index.
The average so-called hybrid security yielded 9.9 percentage points today, according to Merrill’s All Corporates, All Capital Securities index.
Hybrid holders were burned in the financial-company meltdowns last year including in the U.S. seizure of Fannie Mae and Freddie Mac and the takeover of Royal Bank of Scotland Group Plc by the U.K. government. Investors shied away from the securities because they allow issuers to defer interest payments.
Deferral of interest payments is “less of a risk,” Glionna said, because payments on trust preferred securities are cumulative, meaning the borrower must repay any skipped payments after a certain period.
To contact the reporter on this story: Gabrielle Coppola in New York at [email protected]
Last Updated: December 10, 2009 19:00 EST
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Bank Trust Preferreds to Outperform Bonds in 2010, Analyst Says - Bloomberg.com
Bank Trust Preferreds to Outperform Bonds in 2010, Analyst Says
By Gabrielle Coppola
Dec. 10 (Bloomberg) -- Investors should buy trust preferred securities instead of debt that is more senior in banks’ capital structure as yields tighten and the U.S. government withdraws support programs from the financial system, a Barclays Capital Plc analyst said today.
Barclays shifted its recommendation on senior bank debt to “marketweight” from “overweight” for 2010, citing shrinking yields relative to benchmark rates. Preferred securities are more attractive because they offer higher yields than senior debt, even though both are likely to be wiped out in a bank failure, according to Barclays analyst Jonathan Glionna.
“We believe the most attractive place in the capital structure, and the place where we should be adding exposure, is in the trust preferred bucket,” Glionna said on a conference call today with investors. The value in senior bank bonds is “not as compelling as it once was, and not compelling enough to justify a high-risk stance around the sector,” Glionna said.
Trust preferred securities, which have characteristics of both equity and debt, are used by financial firms to bolster capital. The hybrids rank after debt for repayment in a bankruptcy.
The average yield on bank bonds has fallen 5.41 percentage points from a high of 10.37 percentage points on March 10 to 4.96 percentage points today, the lowest since April 2005, according to Merrill Lynch & Co.’s U.S. Corporates, Banks index.
The average so-called hybrid security yielded 9.9 percentage points today, according to Merrill’s All Corporates, All Capital Securities index.
Hybrid holders were burned in the financial-company meltdowns last year including in the U.S. seizure of Fannie Mae and Freddie Mac and the takeover of Royal Bank of Scotland Group Plc by the U.K. government. Investors shied away from the securities because they allow issuers to defer interest payments.
Deferral of interest payments is “less of a risk,” Glionna said, because payments on trust preferred securities are cumulative, meaning the borrower must repay any skipped payments after a certain period.
To contact the reporter on this story: Gabrielle Coppola in New York at [email protected]
Last Updated: December 10, 2009 19:00 EST