Trust Preferred Securities

Trust Preferred Securities (TruPS) constitute approximately 50-60% of AFN’s total investment portfolio. TruPS are Hybrid instruments that have characteristics of both debt and equity securities, including quarterly dividend payments that are tax deductible, similar to bonds, and dividend payments similar to preferred equity. AFN invests in TruPS issued by middle market banks and insurance companies, most of which are originated by our manager or one of its affiliates. We define “middle market banks” as entities with between $75 million and $10 billion in assets and “middle market insurance companies” as entities with between $10 million and $500 million in total statutory capital.

Under current regulatory and tax structures applicable to depository institutions and insurance companies, the proceeds from TruPS are treated as primary regulatory capital, unlike the proceeds from an issuance of debt securities. In addition to favorable regulatory treatment, TruPS are often attractive to banks and insurance companies because TruPS issuances are often cost effective, non-dilutive to the shareholders of those companies and efficiently executed. Investments in these financial institution classes provide AFN with tremendous geographic and industry diversity in highly regulated industries. Because of the extensive monitoring of these industries by federal agencies, including the FDIC and SEC, they tend to have very low default rates. Between 1934 and 2002, the average annual default rate for the FDIC-insured banking industry was 0.22%. Since 1972, U.S. Insurance companies, across all ratings, have experienced an average annual default rate of 0.69%.