Security Pricing

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VOBA

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Can someone give me a comparable spread, or ideas on how to get comfortable with a pricing range for this security:

Puttable Trust Preferred
Rating: BBB, Baa2

This is for a $200MM Start-up Company rated A
 
Gotta read that one. 'puttable', 'trust', and 'preferred' all mean something...
 
So the company is rated "A", but the security itself is rated BBB?

Do you have a Bloomberg? Spreads change all the time, but you can get the market yields for industry, country, security and grade from Bloomberg.

The easiest way would be to look up the yields of like securities (grade, term, options, industry, etc...)

Where did the rating come from? S&P, Moody's?
 
"So the company is rated "A", but the security itself is rated BBB?"

Yes...not sure why, but it's something we're taking issue with and may change. I don't have access to a Bloomberg terminal.

Company 'A' rating is from Fitch
Target security BBB rating will be from S&P

This is a "soft-capital" facility somewhat common in the insurance industry. 30 year term, Trust Preferred with a Put Option for the Company.

The only comp I have is an August Financial Institutions Market report from HLHZ which shows average BBB corporates implied spread over 30-yr Treasury at 150 bps. I'm guessing there will be a premium of around 50-150 bps to that for a security like this, but it would help to have some comps.

Thanks for the input.
 
VOBA -

I'm sorry that I didn't answer you more clearly. The specifics of this security are very likely to be the crux of the matter, not the stuff about BBB or the company rated A. These securities clearly have embedded put options which may be worth a bunch or maybe not. The "Trust Preferred" I suppose means that we are talking securities sold to investors as preferred stock while some company (usually a bank holding company) funds a trust with debentures?

You just have to do the usual legwork on it. Separate the options from the bond, if possible. Value the bond by looking at TPS of similar size and credit ratings. Value the options using your favorite option model.

Maybe if you could be more specific about your question, we could help more.
 
Joi:

Sorry, I thought that securities like these might be more common:

Trust Preferred: you are correct in that a trust is funded with highly rated debentures, which is used to purchase preferred stock if the the company excercises the option.

Put Option: Company will excercise this option if more capital is required to maintain rating, large losses, etc. This piece is senior to the $200M equity though, which makes me wonder why the target is BBB when the company is A.
 
These securities are not particularly common (and I hope they stay uncommon).

Usually in a TPS the company sets up a special purpose vehicle which holds the trust. The SPV sells preferred stock, gives the proceeds to the company, who gives the SPV a debenture of the same terms as the preferred stock. Then there are various tax games, capital adequacy games, accounting games, etc.. that I think are decidedly unclever. This doesn't sound like exactly what you have described.

The sort of obvious reason that the TPS has a lower credit rating than the company is that the TPS is not issued by the company but is issued by the SPV. The SPV is funded with the debentures so its creditworthiness cannot be better than the debentures and can certainly be worse. The other reason is that the debentures can be and usually are subordinated. It probably does not make sense for a company to pay preferred stock rates but guarantee payments with unsubordinated debt (hmmm.., getting beyond my expertise there maybe).

Who does this put option benefit? If someone is trying to sell me a "puttable" bond, I assume that the put option benefits accrue to me. Thus, there should be some schedule that says if the TPS and I are no longer friends in a year, I can send it back to the company for a full refund (or something similar).

All preferred is "senior" to equity. That doesn't mean anything except that preferred gets paid dividends before regular equity issuers get paid dividends.
 
Thanks for taking time to think about this.

This is a little different from how you described. The SPV sells pass-through securities and uses the proceeds to buy a high-grade commercial paper and US Treasury portfolio. The company pays the SPV a monthly premium for the preferred put option, and in return has a fully collateralized facility for capital adequacy/ratings purposes.

The rating issue is still a little confusing because the Trust Assets have to be AAA or backed by US Gov, and the company (insurance company) has an A rating. The put option benefits the company, but they will only excercise the option if losses effectively eat all of the equity (which is what I meant about being 'senior', not the traditional (debt > preferred > common) concept).

In terms of pricing this, do you have any kind of info? The Bank is suggesting a fairly wide spread and charging a boat load to place it as well. I'm just trying to get comfortable that we're not getting (totally) fleeced.
 
I guess that I do not have any unique info on this (in fact, I am still not sure I understand the put option). However, it seems to me that this is not a plain vanilla TPS security. Even in a plain vanilla TPS, the stuff I have read always says something like "these are a really good idea because [lot of stuff] however the cost of issuance might be prohibitive". It's probably not that you're getting totally fleeced; it's just that it's tough to place this stuff.
 
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