What are Replacement Capital Covenants and why is the change in "covered debt" significant?

Replacement Capital Covenants are agreements that U.S. Bancorp entered into in connection with the issuance of certain preferred stock and trust securities. These covenants typically require the company to maintain a certain level of "capital" in a specific form. The "covered debt" designation specifies which of the company's debt instruments qualify as this capital for covenant compliance. Changing the covered debt means that different debt instruments will now be counted towards meeting these obligations, which could have implications for covenant adherence and the financial flexibility of the company.

How does the Volcker Rule affect U.S. Bancorp's real estate subsidiaries?

The Volcker Rule restricts banking entities from investing in or sponsoring "covered funds." U.S. Bancorp has determined that its REIT subsidiaries, USB Realty Corp. and Firstar Realty L.L.C., qualify for an exclusion under Section 3(c)(5)(C) of the Investment Company Act of 1940, as they are primarily engaged in acquiring mortgages and real estate liens. This specific exclusion is not impacted by the Volcker Rule's prohibitions on funds relying on Section 3(c)(1) or 3(c)(7) exclusions. Therefore, the company believes it will not need to sell or change its investments in these REITs due to the Volcker Rule.

What are the specific debt instruments involved in the "covered debt" change?

Effective February 1, 2014, the 3.442% Remarketed Junior Subordinated Notes due 2016 will cease to be covered debt. In their place, the 7.50% Subordinated Debentures due 2026 (CUSIP No. 911596AL8) will become covered debt for certain covenants, and the 2.20% Medium-Term Notes, Series T, due 2016 (CUSIP No. 91159HHB9) will become covered debt for others.

Does this filing indicate any financial distress or new risks for U.S. Bancorp?

This filing does not indicate financial distress. It is a routine disclosure of changes in debt designations under existing covenants and clarification regarding regulatory compliance with the Volcker Rule. The company's assessment that its REIT subsidiaries are not affected by the Volcker Rule suggests that ongoing business operations and investments in this area can continue as planned.

US BANCORP \DE\ 8-K SEC Disclosure

Summary

This Form 8-K filing by U.S. Bancorp (USB) on January 31, 2014, primarily announces two key developments: a change in the "covered debt" under its Replacement Capital Covenants and an update on the impact of the Volcker Rule on its REIT subsidiaries. The company is shifting its designation of covered debt from the 3.442% Remarketed Junior Subordinated Notes due 2016 to specific subordinated debentures and medium-term notes, effective February 1, 2014. This change is important for covenant compliance and may affect the characteristics of debt that qualifies under these agreements. Furthermore, U.S. Bancorp addressed the implications of the recently finalized Volcker Rule, which restricts banking entities from holding certain interests in "covered funds." The company stated that its REIT subsidiaries, USB Realty Corp. and Firstar Realty L.L.C., are structured to qualify for an exclusion from the definition of a covered fund under Section 3(c)(5)(C) of the Investment Company Act of 1940, rather than Sections 3(c)(1) or 3(c)(7) that are impacted by the Volcker Rule. As such, U.S. Bancorp believes it will not be required to divest or alter its investments in these REIT subsidiaries.

Key Highlights

1U.S. Bancorp is changing its designated "covered debt" under multiple Replacement Capital Covenants, effective February 1, 2014.
2The 3.442% Remarketed Junior Subordinated Notes due 2016 will no longer be considered covered debt.
3The 7.50% Subordinated Debentures due 2026 and 2.20% Medium-Term Notes, Series T, due 2016 will become the new covered debt for various covenants.
4The company is addressing the impact of the Volcker Rule on its real estate investment trust (REIT) subsidiaries.
5U.S. Bancorp believes its REIT subsidiaries (USB Realty Corp. and Firstar Realty L.L.C.) are not "covered funds" under the Volcker Rule.
6These REIT subsidiaries operate under Section 3(c)(5)(C) of the Investment Company Act of 1940, which is not affected by the Volcker Rule's restrictions on 3(c)(1) and 3(c)(7) funds.
7The company anticipates no requirement to divest or modify its holdings in these REIT subsidiaries due to the Volcker Rule.

US BANCORP \DE\ 8-K Report, Corporate Update (Jan 31, 2014)

Summary

Key Highlights

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