Friday, May 8, 2020

TruPS CDOs: What Virus?

While the rating agencies have been actively downgrading bonds across almost all sectors, we thought it may be fun to compare the performance of regional US banks during COVID-19 against their performance during the 2007-2008 financial crisis.

Bank TruPS CDOs are deals supported by trust preferred securities issued by regional/community banks.   Interestingly enough, since the onset of the coronavirus, the TruPS CDOs (if anything) have been going up from a ratings perspective.

Yesterday, Kroll Bond Rating Agency affirmed the ratings of a 2018 deal, without making any mention of the coronavirus.  Meanwhile in a series of (we count four) ratings releases since March, Fitch has upgraded dozens of tranches, and affirmed many others too. No downgrades, and no mention of COVID-19.

So why the upgrades?  The likely answer is that many of the upgrades have been lingering for a few years, and just had to happen at some stage, so why not now?

Here's one of the more interesting bonds, the $70mm top tranche (originally AAA) of a 2005 deal called Regional Diversified Funding 2005-1, which has seen both crises.  

Read the chart from the bottom up.  Pre-crisis, Fitch has it at AAA, until it was (rather dramatically) downgraded on a single day to CCC in 2009.  That's incredible.  Okay, fast forward and it's single C in 2010, Fitch's lowest rating: an expectation of full or almost full wipeout. 


Since it had gone from AAA (sacrosanct) to C (a dead-beat) it's just as incredible that it has since marched back up to CC (in 2015, of all times) and then CCCBB and now (as of yesterday), which is a serious investment grade rating.  

Nevermind the coronavirus!



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