TEXT-Fitch: wind-down of TARP's CPP may impact TruPS CDOs

Fri Feb 15, 2013 10:46am EST

Feb 15 - Fitch believes steps taken by the U.S. Treasury to wind down TARP's
largest bank program could lead to incremental cures in some Fitch-rated CDOs
collateralized by bank-issued trust preferred securities (TruPS CDOs). Fitch
estimates there are currently 109 issuers across Fitch-rated TruPS CDOs that
remain participants in the Capital Purchase Program (CPP). At its peak, Fitch
estimates this exposure reached 208 issuers. By comparison, only 218 of the 707
banks that originally used CPP remained in the program as of December 2012.

The Treasury intends to wind down the remaining CPP investments over the next
year through a series of repayments, restructurings, and sales, which include
auctioning investments in banks that are not expected to pay in the near future.
With the dividend step-up from 5% to 9% five years after issuance, banks have a
strong incentive to exit the CPP.

Securities issued under CPP are considered junior to TruPS and, to the extent a
bank is deferring on its TruPS interest, it may be limited in its ability to
distribute payments to securities issued under the CPP program. We believe the
Treasury's intent and the incentives described above will likely lead to an
acceleration in the pace of banks' exits from the program, which in turn may
have implications for CPP recipients held across TruPS CDOs that are currently
deferring on their TruPS.

Although based on a relatively small number of observations, across Fitch's CDO
universe, 12 previously deferring former CPP participants were able to cure
their deferrals and exit the CPP program. Nine out of these 12 cured their TruPS
interest within a year prior to exiting the CPP program. In addition to these 12
issuers, seven cured their TruPS but remain in the CPP program. Conversely, only
four of the 45 currently deferring issuers that received CPP funds have exited
the program. Of these four issuers, two cured their TruPS prior to or at the
time of their CPP exit only to re-defer shortly after. The remaining 41
deferring issuers remaining in the CPP program collectively represent $1.3
billion in notional value across Fitch-rated TruPS CDOs.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article, which may include hyperlinks to companies
and current ratings, can be accessed at www.fitchratings.com. All opinions
expressed are those of Fitch Ratings.
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