In the current economic environment, many banks have lost significant capital and are under immense pressure, regulatory and otherwise, to recapitalize. Failure to recapitalize within time frames set by bank regulators can result in a bank’s seizure by its chartering authority and an FDIC receivership.
Such recapitalizations have been challenging for many financial institutions. All such recapitalizations carry with them the prospect of severe dilution for bank shareholders. In addition, a particular challenge is presented by holders of holding company trust preferred securities, or “TruPS.” Those seeking to recapitalize financial institutions (or acquire undercapitalized financial institutions) often seek to reduce the position of TruPS in an institution’s capital structure as a way of enhancing the value of each recapitalization dollar. In certain cases, recapitalization simply does not “pencil out” with the TruPS continuing to hold their full claim against the issuing parent holding company.
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