An outspoken investor in trust-preferred collateralized debt obligations is seeking to strip Bank of New York Mellon Corp. of its trusteeship in a host of the instruments.
Hildene Capital Management's main complaint is of inaction, reflecting a disagreement over the extent to which a trustee should — or must — distribute information to investors and facilitate group efforts to defend their interests. Brett Jefferson, Hildene's president, announced the effort to replace Bank of New York Mellon with a new trustee in a letter to investors Tuesday. He also accused the company of erring in cash flow distributions — a mistake that it alleges cost preferred shareholders more than a million dollars.
In an e-mail, a spokesman for Bank of New York defended the company's performance.
"We have specific duties as defined by the relevant agreements as CDO trustee," the e-mail said. "We have been fully performing our duties and will continue to do so."
"Trups CDOs" are pools of trust-preferred securities, a hybrid of debt and equity often issued by banks and insurance companies during the last decade. Hit hard by the wave of bank defaults during the financial crisis, the value of the CDOs plunged and remain distressed. Funds like Hildene saw the prices as a bargain, and have aggressively sought to protect the value of the pooled securities. In doing so, however, they have sometimes tangled with the trustees that stand between investors and the CDOs' underlying collateral.
Generally speaking, trustees pass along cash produced by the collateral and perform administrative functions.
In its attempt to remove Bank of New York Mellon as trustee, Hildene has launched a trust-preferreds "registry" geared at organizing investors without trustee assistance. Removing a trustee would require a two-thirds vote by securities holders, and by its own admission, Hildene's holdings are not anywhere near the size necessary to perform such a removal by itself.
But the fund has had some success at organizing other trust-preferred investors in the past to block deals that it considered disadvantageous, and Jefferson claimed in the letter that Bank of New York Mellon "was recently notified that it is being removed as the trustee for 5 Trups CDO transactions" unconnected to Hildene's efforts.
Bank of New York Mellon did not immediately respond to a request to comment on the accuracy of those five removals.
To strip Bank of New York from the deals in which it is involved, Hildene would need assistance from large trust-preferred CDO holders, such as Assured Guaranty Ltd. and Zions Bancorp. Assured Guaranty declined to speak about Hildene's attempt. Zions did not immediately respond to requests for comment.
Regardless of its ultimate efficacy, Hildene's move represents an escalation in longstanding investor-trustee tensions. A small group of activist investors have been openly critical of Bank of New York Mellon in the past, with another fund, Wolf River Capital, suing the trustee over a trust-preferred issuer's repurchase of its own discounted collateral from a deal.
More recently, however, Hildene sparred with Bank of New York Mellon during the bankruptcy of AmericanWest Bancorp, which was sold after filing for bankruptcy and wiping out trust-preferred debtholders. Seeking a resolution which would have resulted in at least a partial recovery for trust-preferred holders, Hildene tried to get Bank of New York Mellon to organize bondholders and make an appearance in the proceedings. When that failed, Hildene itself appeared in court — with Deutsche Bank's and Zions' backing — in an unsuccessful attempt to stand in as the representative of investor interests.
In another instance, Hildene said Bank of New York Mellon failed to act quickly enough to notify investors of a plan by Builders Financial Corp. to repurchase its pooled trust preferreds for ten cents on the dollar in bankruptcy. The owners of Builders, Jefferson wrote in the letter, appear to be "betting that the trustee… will not appear in court to object to a one-sided bankruptcy plan designed to benefit stockholders at the expense of the Trups holders."
"We believe it is important that the CDO trustee be willing and able to appear promptly in such matters and that the trustee should take affirmative steps to facilitate the organization of noteholders," the letter said. "Presented with similar situations, other CDO trustees have arranged calls with noteholders to discuss important matters, and we believe that the replacement trustee will do the same."