Trust Preferred Securities (TruPS) are a hybrid instrument issued by an issuing bank that combines the features of a bond and a preferred share. It is a share in a trust formed by the bank at the expense of borrowed capital.
Similar to bonds, the TruPS:
— provide for regular monetary payments;
— are taxable according to the benefits applicable to coupon income;
— as a rule, have a predetermined maturity date.
At the same time, the FRCS:
— by form of security, are preferred shares of the trust;
— are recognized as shares in the capital structure;
— may stop payments if the issuer does not pay dividends on its shares.
An interest rate on TruPS is higher than that on bonds of similar credit quality (for example,
Citigroup, 7.875% 30oct2040, USD). This is explained by the increased risk of the asset to the investor: securities of this type may be redeemed early and payments may be suspended. Besides, when purchasing TruPS, the investor does not become a shareholder of the bank, but just acquires a part of the trust’s assets.
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