Trust me, I don't Prefer you

Investors in Trust Preferred securities have had almost a rough a time as those that owned the Common Equity. As evidenced by the Citigroup conversion a few weeks ago, securities that looked like debt to the uninitiated have turned out to be equity-like. If you thought that was bad, spare a thought for the poor investors that bought Bradford & Bingley or Northern Rock subordinated debt who recently were defaulted on by the British Government.

Of course, at the back of their minds, the guys that bought sub-debt always *knew* that if they were being honest with themselves that they were taking equity-like risk. But when those banks were nationalised they thought they had a "get out of jail free" card.

But apparently not.

Fitch yesterday downgraded the subordinated debt of several UK and European banks, and the European Commission has already told Anglo Irish to defer payments on hybrid notes. The idea that subordinated debt & other low-placed elements of the capital structure will take losses has long been my opinion. As losses come through the system, the cack-handed way in which governments enacted their bail-out programs (especially the Americans) means that there is very little chance of them getting more money once the existing funds are drained, so creditors *will* take a hit.


The UK is way ahead of the pack on this one - guarantee the Senior Debt (which ensures that you can fund your Current Account deficit), but rightly hit those who took risk in trying to Arb you (as discussed above, those who bought sub-debt either knew the risks, or *should* have known the risks).


Obviously, the Trust Pfd conversion in Citi represented a large dilution - if a similar thing is going to happen in Europe, then there could be a rush for the door. Something of a shot across the bows (much like the rumours of a rights issue from Lloyds the other week).


But someone must be paying attention for ING's Preferreds to fall 26% yesterday...