On Thursday, The PNC Financial Services Group Inc. (PNC) announced that it will redeem trust preferred securities (TruPS) worth $967.5 million in total. The decision follows the new capital proposal that the TruPS issued before May 19, 2010 would no longer qualify for Tier 1 capital ratio calculations beginning 2013.
TruPS redemption by PNC Financial will include 7.750% PNC Capital Trust E worth $450 million as well as 8.0% National City Capital Trust IV TruPS worth $517.5 million. While the former has a scheduled redemption date of March 15, 2038, the latter’s scheduled maturity date is September 15, 2047.
Both categories of TruPS would be redeemed at $25 per TruPS. It represents 100% of the liquidation amount, in addition to accrued and unpaid distributions until the redemption date arrives. PNC Financial will use its existing available cash to fund the redemptions on July 30, 2012.
The paying agent for the PNC Capital Trust E TruPS is The Bank of New York Mellon Corporation (BK) while The Bank of New York Mellon Trust Co., a part of The Bank of New York Mellon, is the paying agent for National City Capital Trust IV TruPS.
Taking into account these redemptions as well as other trust preferred securities redeemable at par in the fourth quarter of 2012, PNC Financial anticipates that the second half noncash charges in aggregate would be $162 million. This is above the prior projection of $150 million, which the company disclosed in its first quarter 2012 filing with the Securities and Exchange Commission.
Previous TruPS Redemptions
Earlier in April, PNC Financial announced the redemption of $500 million in TruPS, which took place on May 25, 2012 at $25 per share. It included redemption of 6.625% preferred securities worth $500 million issued by National City Capital Trust III.
Also in March, PNC Financial announced the redemption of $306 million in TruPS, which took place on April 25, 2012 at $25 per share. It included redemption of 6.125% capital securities of $300 million, issued by the PNC Capital Trust D and $6 million of 10.18% MMCapS capital securities issued by Yardville Capital Trust III.
The redemption of TruPS by PNC Financial follows the Federal Reserve’s nod for the company’s capital actions. As part of its capital actions, PNC Financial made a proposition relating to an increase in its quarterly common stock dividend. Moreover, the company projected a moderate share buyback program under its existing common stock repurchase authorization.
In April, PNC Financial announced a 14% hike in its quarterly dividend. With this increase, the quarterly cash dividend now stands at 40 cents per share, up 5 cents from 35 cents paid earlier. Moreover, PNC Financial also intends to buyback up to $250 million of common stock under its existing 25 million shares repurchase program, during the remainder of 2012. The clearance of the stress test bears testimony to PNC Financial’s solid capital position.
Our Take
The redemption of TruPS is a strategic fit as such moves provide banks the opportunity to lower their interest expense. Moreover, it will also help in satisfying the regulatory norms since according to the Dodd-Frank Act, from 2013, banks will no longer be able to consider these securities as regulatory capital.
Similar to PNC Financial, other Wall Street biggies have also come up with plans for TruPS redemption. JPMorgan Chase & Co. (JPM) announced its plan to redeem about $9 billion in TruPS in July. The others are Sun Trust Banks Inc. (STI) and Citigroup Inc. (C).
PNC Financial currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain our long-term Neutral rating on the stock.
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