Minnesota Bankruptcy Delivers a Trust-Preferred Reality Check

Investors in trust preferred securities are resorting to some aggressive options for prying payments from recalcitrant banks. American Bancorp. entered liquidation when a group of companies that manage collateralized-debt obligations backed by the bank's trust-preferred securities pressed for involuntary bankruptcy to collect on $48.1 million in debt and unpaid interest. The bankruptcy could be a wake-up call for other banks in danger of defaulting on trust-preferred securities. It will also serve as a test of this tactic, and also give regulators a hint of how a forced bankruptcy will impact American's bank. Some companies laden with trust-preferred securities, like First Mariner Bancorp and North Texas Bancshares, voluntarily filed for bankruptcy protection and sold off their banks after hitting the end of their deferral periods. Others have tried to negotiate with trust-preferred holders to repay debt at a discount, or have sought fresh capital to facilitate payments. If the bank enters a bankruptcy auction, the price it fetches could determine if other investors try to force involuntary bankruptcies.