RPT-Fitch: TruPS CDOs Exposed to Banks Remaining in TARP CPP

Thu Feb 13, 2014 8:56am EST

Feb 13 (Reuters) - (The following statement was released by the rating agency)

TARP's biggest program, the Capital Purchase Program (CPP), is winding down. Many of the banks left in it are smaller community institutions with typically narrow geographical footprints and franchise recognition that struggled to attract new capital through new issuance or generate interest from private investors at auction sales. TruPS CDOs are exposed to those banks, Fitch Ratings says.

Of the $1.8 billion of Fitch-rated TruPS CDOs, $1.2 billion are attributed to two issuers domiciled in Puerto Rico, both of which are challenged by the region's economic conditions. First BanCorp (rated 'B-'/Stable by Fitch) and Popular, Inc. ('B-'/Stable) have $239 million and $935 million of CPP securities, respectively. Popular is current on its TruPS, while First BanCorp is deferring on the $225 million in notional value.

Most financial institutions in the program are also facing a steep dividend increase this year, from 5%-9% on the CPP preferred shares.

The U.S. Treasury had invested approximately $205 billion under its CPP, launched in 2008, to stabilize the financial system by providing capital to financial institutions throughout the country. The investments were in Tier-I capital equity interests in the eligible financial institutions and ranged in size between 1% and 3% of the risk-weighted assets. At its peak, the Treasury provided capital to 707 financial institutions, including more than 450 small and community banks.

At the end of January, only $2.1 billion across 84 banks remained in the program, a result of a three-pronged exit strategy that included outright repayments, restructurings, and auction sales. Fitch-rated TruPS CDOs have the combined exposure to 47 remaining CPP participants (down from 108 last year) whose combined CPP investments comprise $1.8 billion of the remaining $2.1 billion. These issuers represent $813 million in TruPS held by Fitch-rated TruPS CDOs. Thirty-four issuers, or $673 million in TruPS collateral ($755 million of CPP), are currently deferring interest on their TruPS. Seven issuers ($82 million in TruPS and $120 million in CPP) cured their prior deferrals.

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