What are financial trust-preferred securities (TruPS)?
Trust-preferred securities are a form of preferred shares of financial firms which are required to maintain certain capital requirements by their regulators. Like preferred shares, a financial institution can stop making payments to preserve its capital base. Unlike preferred shares, however, the institution can defer its payment obligations only for 5 years. It must repay all missed payments within 5 years or the institution will be in default and can be forced into bankruptcy. TruPS are considered a cheap form of equity by the firms because they can be counted as part of their tier 1 capital and unlike dividends, the payments are tax-deductible to the firm.
