First Chicago stirs speculation.

First Chicago Corp. may use an upcoming $300 million preferred stock issue to facilitate a planned balance-sheet cleanup or to make acquisitions, analysts said.

In its filing with the Securities and Exchange Commission, First Chicago said it would use the proceeds to refinance debt and for general corporate purposes. It declined to elaborate, but analysts suggested a variety of potential uses for the new funds.

"Certainly, its capital is at acceptable levels already, but more capital would increase" the company's "range of flexibility," said John Leonard, analysts at Salomon Brothers Inc.

Help for Capital Ratio

A $300 million preferred stock issue would add about 60 basis points to the company's Tier 1 capital ratio, which was 6.4% at June 30.

Added capital could support an "opportunistic purchase" of assets, such as a credit portfolio or bank in the Chicago region, Mr. Leonard said.

The company could also use proceeds of the preferred stock to facilitate a restructuring of up to $3 billion in assets, analysts said.

In the second quarter, the company announced plans to dispose of problem real estate and nonstrategic assets. It said it is considering moving the assets to a separately capitalized "bad bank."

Whether or not First Chicago opts for a bad bank, a restructuring would cause it to increase reserves, thus potentially eating into capital.

In a July 15 report, Salomon estimated that $350 million to $450 million in additional reserves would be needed if the assets were written down but kept within the bank.

Creation of a bad bank would add $200 million to $250 million to the restructuring's cost, Salomon said.

But First Chicago's portfolio of venture capital equity investments already gives it a significant cushion against writedowns of problem assets, said Mr. Leonard. The venture capital portfolio had unrealized gains of more than $500 million at the end of the second quarter.

Funds from the preferred stock offering could potentially be used to bring First National Bank of Chicago from "adequately capitalized" to "well-capitalized" under new Federal Deposit Insurance Corp. criteria.

This is important because well-capitalized banks will pay the lowest deposit insurance premiums when risk-based premiums take effect next year.

A well-capitalized bank is defined as one with 5% leverage, 6% Tier 1, and 10% total capital ratios.

First National of Chicago did not meet the well-capitalized criterion at June 30, when its Tier 1 ratio stood at 5.2% and total capital ratio at 9.1%. Its leverage ratio exceeded the FDIC standard.

A preferred stock sale by First Chicago would take advantage of low interest rates. The bank could probably sell preferred stock with a dividend somewhat above 8% in the current environment, estimated one capital markets source.

In contrast, First Chicago's last preferred stock sale, in May 1991, carried a coupon of 10%.

Underwriters were not named.

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