To the Editor:
I am writing in response to Joseph F. Sinkey Jr.'s commentary, "Issuing Trust-Preferred Too Good a Game to Sit Out" (Dec. 21, page 18).
I agree with most of Mr. Sinkey's observations about trust-preferred securities and the many advantages they afford banks with respect to it being an extremely low-cost and flexible form of Tier 1 capital.
However, Mr. Sinkey states that smaller banks have not taken advantage of trust-preferred securities, due in part to the costs associated with issuing the instruments and the lack of investor interest among institutions for the securities of small banks.
I would like to point out that there is a flourishing market for small banks' trust-preferred, and that issuance costs are very reasonable.
Moreover, the all-in costs for trust-preferred are quite cost-effective for smaller issuers, with many transactions done to date at an after-tax yield of well under 6% for this Tier 1 instrument. Most of the one-time, up-front costs can be amortized over the 30-year life of the instrument.
My firm, Ryan, Beck & Co., has underwritten trust-preferred offerings in amounts as low as $10 million, and transactions have taken place at even smaller sizes. One reason we are able to bring the securities of smaller banks to market is because of the development of a retail investor market for trust-preferred securities.
In these retail transactions, small issuers gain access to the trust- preferred market while actually gaining more favorable terms than is demanded of institutional investors.
For example, "retail" transactions are generally structured with five- year calls at par, as compared to the premium demanded of early calls (usually 10 years) on institutional transactions. In addition, unlike larger issuers, smaller issuers can go to market without having to get ratings by the rating agencies.
I agree with Mr. Sinkey's premise that "issuing trust-preferred (is) too good a game to sit out," but I would point out that it is very much in reach for smaller institutions in terms of cost and investor interest.
First vice presidentRyan, Beck & Co.Livingston, N.J.