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US Bancorp leads way on exchanging TruPS
April 18 (IFR) - US Bancorp played institutional and retail investors off against one another this week to price a blowout $1.085bn Tier 1 capital security at 6%, the lowest-ever coupon for such a structure.
Fresh from beating earnings estimates on Tuesday, the Minneapolis-based regional bank cast the widest possible net by structuring its perpetual non-call five-year preferred offering to appeal to the two usually separate investor pools.
In doing so, it attracted $3bn in orders -- and ratcheted in the pricing, in yield terms, to 6% from 6.125% at official guidance.
That's far more orders -- and 50bp tighter in coupon -- than US Bancorp attracted in January for a $1.1bn perpetual non-call-10-year deal at 6.5%.
With the two deals combined, the bank is among the most active of the biggest US banks in replacing trust-preferred securities, or TruPS, before they lose their Tier 1 capital security status under Dodd-Frank legislation kicking in in January.
"US Bancorp has been very proactive in redeeming a significant majority of its legacy TruPS and has generally replaced those securities with preferred stock, which we believe will be Basel III qualifying tier 1 capital," said Kevin Ryan, co-head of FIG capital markets at Morgan Stanley.
"At the same time, the company has taken advantage of strong retail and institutional investor demand to achieve a record low dividend yield for a US bank preferred issuer."
Like its January deal, the latest offering was structured in a retail friendly $25-par format, but to enhance institutional participation and maximize distribution channels, the deal floats if it isn't called in year five.
Only $125m was placed with retail investors, which seems to be typical of benchmark-sized bank perpetual preferreds, given that fees for a retail offering are much higher, at 3.15%, than institutional-only preferreds, which are in the 1.0-1.5% range.
But the small retail participation was also part of the bookrunners' strategy of using retail investor interest to improve pricing dynamics.
If institutional investors are showing sensitivity at a certain yield level, underwriters can afford to see the more price-sensitive fund managers drop out of the book if they can turn on the retail faucet and sell $100m-$200m or more to retail investors.
USB did just this on both of its perpetual preferreds this year -- $125m going to retail in the latest offering and about $200m of the perp non-call 10-year sold to retail in January.
Traditionally, retail buyers are much less price-sensitive than institutional investors, and USB could possibly have pushed below 6%. The risk, however, was that its $3bn book would have substantially dissolved, putting the size of the deal in jeopardy and hiking up the deal cost in terms of fees.
"There is definitely a psychological line drawn in the sand at 6% for prefs, although that line could change," said one syndicate head.
At 6%, the perp non-call five year essentially priced flat to the 5.99% trading yield on its perp non-call 10-year.
Although the yield curve between five- and 10-years is basically flat for prefs, institutional investors were compensated for the greater flexibility of having a five- rather than a 10-year call, because the spread over Libor is far greater on the new deal than on the earlier transaction.
The sizeable swap curve between five- and 10-years gives investors in the perp non-call fives a juicier back-end spread of L+486.125bp if the deal isn't called, versus L+446.8bp on the perp non-call 10-year.
The deal has traded solidly, and was quoted in the grey market at $25/30.
Hopes are that other banks will follow suit although, like USB, they would need to have TruPS that are ready to be called if they didn't want to pay a premium to redeem them.
Most banks are waiting for the Federal Reserve to issue a Notice for Proposed Rulemaking on its views of the Basel III capital adequacy guidelines. That would be considered a capital event by many banks, which by law entitles them to redeem the TruPS at par.
Others might simply wait until January 2013, when the TruPS will be phased out under Dodd-Frank as non-common Tier 1. Over the next 12 months, banks are expected to redeem about a third of the $92bn of TruPS they issued in the early 2000s as Tier 1 capital.
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