Davis Polk discusses Trust-Preferred Securities and Involuntary Bankruptcy

The involuntary chapter 11 bankruptcy filing of American Bancorporation (“American”), commenced by a group of distressed debt investors holding American’s trust-preferred securities (“TruPS”), was upheld by the U.S. Bankruptcy Court for the District of Minnesota pursuant to an order entered on May 27, 2014. This development highlights the use of involuntary bankruptcy as the latest strategy by TruPS holders to increase their leverage and recovery in distressed bank holding company situations.

Background

TruPS are deeply subordinated junior debentures issued to statutory trusts that in turn issue preferred securities. They were at one time a commonly used structure for financing bank … Read more