Key Takeaways:

• PCAPs issuances have rebounded in 2025 as interest rates have declined off of recent highs and remained stable.
• In a first-of-its-kind transaction, Mexico was the first sovereign to issue PCAPs to recapitalize Petróleos Mexicanos, or Pemex, using U.S. Treasury collateral to avoid having to resort to a sovereign debt issuance as a source of rescue capital.

Following a multi-year hiatus as interest rates increased off of the lows of the 2010s and early 2020s and there were few, if any, issuances of pre-capitalized trust securities (“PCAPs”), we have recently seen the resurgence of PCAPs transactions as interest rates have declined from more recent highs and remained stable.

The resurgent popularity of PCAPs owes much to the flexibility that the contingent nature of the financing structure provides given increased economic uncertainty and the desire to have ready funds for acquisitions, debt refinancings or other corporate imperatives. While the PCAPs structure was originally considered contingent capital of last resort, market perception has shifted, and any stigma once associated with draws under these facilities has fallen away.

Recent Insurance Company Issuances

There have been a number of new PCAPs issuances in 2025. In March 2025, Principal Financial Group, Inc. issued a new 30-year PCAPs and exercised the put option on an existing PCAPs issued in 2018, distributing the underlying senior notes to holders of the PCAPs. Similarly, in March 2025, MetLife, Inc. issued a new 30-year PCAPs. More recently, in May 2025, both Voya Financial, Inc. and Lincoln National Corporation issued PCAPs with maturities ranging from five to 30 years. We are also aware of a number of other issuers that have been considering the structure so as to be ready to go to market at an opportune time.

First Sovereign Issuance

In a first-of-its-kind transaction, in July 2025, Mexico issued $12 billion in aggregate principal amount of five-year PCAPs to recapitalize Petróleos Mexicanos, or Pemex, using U.S. Treasury collateral to avoid having to resort to a sovereign debt issuance as a source of rescue capital. The securities issued were U.S. dollar-denominated securities, with the Eligible Assets (as described below) placed in the issuance trust. The issuing trust utilized in the Pemex structure was an entity organized in Luxembourg (as compared to the typical use of a Delaware trust), most likely for tax-related reasons. The Eligible Assets were then lent to Pemex, which used the securities to enter into repurchase agreements with investment banks, providing Pemex with cash to be used to repay some its outstanding indebtedness. The PCAPs are off-balance sheet for Mexico, and the primary credit risk is to Mexico, as any notes issued to the trust by Mexico will constitute the public debt of the Mexican government. Interestingly, Mexico does not have the ability to optionally draw on the facility, and there are limited events requiring the automatic issuance of notes by Mexico.

Review of PCAPs Structure

As a refresher, PCAPs are a capital markets-based structure that functions as a contingent capital facility. PCAPs share certain key features with typical revolving credit facilities, but PCAPs can be much longer dated with minimal counterparty risk.

General Structure

Generally, in a PCAPs transaction, the sponsoring company creates a new Delaware statutory trust or other special purpose vehicle. That trust issues trust securities to qualified institutional buyers in a Rule 144A/Regulation S offering. The proceeds from the issuance of the trust securities are invested by the trust in a portfolio of principal and interest strips of U.S. Treasury securities (the “Eligible Assets”) that, together with the facility fee described below, matches the expected payments on the trust securities. Concurrently with the issuance of the trust securities, the trust enters into a facility agreement with the company. The facility agreement provides the company with an issuance right (the “Company Issuance Right”) that permits the company, at its option, to issue senior notes to the trust and requires the trust to purchase such senior notes with an equivalent amount of the Eligible Assets. The company is required to exercise the Company Issuance Right in full upon certain automatic or mandatory triggers, including events of bankruptcy or certain payment defaults or if the company’s consolidated net worth falls below a threshold amount. In return for the Company Issuance Right, the company pays the trust a facility fee. The facility fee, together with the income from the Eligible Assets, is equal to the coupon on the trust securities.

Ratings

The trust securities are typically rated in line with the company’s senior notes ratings and are designed to mimic an investment in the company’s senior notes, providing investors a risk profile equivalent to a direct investment in the company’s senior debt.

Exercise of PCAPs Facility

If the company wants to exercise the Company Issuance Right and receive the Eligible Assets, it delivers a notice to the trust. Assuming full exercise of the Company Issuance Right, the trust’s sole asset will be the company’s senior notes. Most PCAPs facilities permit the company to exercise the Company Issuance Right in part, in which case the company would issue a portion of the contractually agreed maximum aggregate principal amount of senior notes to the trust and receive the equivalent amount of Eligible Assets. The trust’s assets would then comprise the remaining Eligible Asset and the senior notes so issued. The facility fee on the unissued senior notes, the coupon on the senior notes and the income from the remaining Eligible Assets would provide sufficient funds to pay the coupon on the trust securities.

Leverage Neutral

One of the key benefits of PCAPs is that PCAPs are leverage neutral day one and are generally viewed positively by rating agencies. Until the senior notes are issued to the trust, the PCAPs are not reflected on the company’s balance sheet and not included in the company’s financial leverage. The off-balance sheet nature of the PCAPs structure enables the company to proactively prepare for contingencies while ensuring the company does not advertise an artificially inflated leverage level or breach any leverage-related financial covenants prior to issuance. Rating agencies generally view PCAPs as a credit positive because they improve a company’s access to liquidity, especially in times of stress.

Refreshable

The PCAPs facility is typically refreshable, which allows the company to repurchase the senior notes with Eligible Assets and then later reissue the senior notes and receive the Eligible Assets.

Other Structural Features

There are a number of structural features designed to provide the company with additional flexibility and optionality, including as a backstop to letter of credit facilities. See our article “The Financing Flexibility of P-Caps” available here for more detail on the structure and available options.

Tax

PCAPs facilities are complex arrangements and raise technical questions as to the correct characterization of the relevant payments for tax purposes. There are multiple paths to concluding the company is entitled to a current tax deduction for its payments, which typically is the main focus in these arrangements. Assuming the relevant criteria are met, the company should obtain a net deduction equal to the spread between the coupon on the senior notes and the return on the Eligible Assets (an amount equal to the pre-draw facility fee) both before and after the facility is drawn.

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.