Banks issued $19.8 billion of debt and equity in the second quarter, virtually unchanged from the previous quarter, despite an 18% plunge in total corporate issuance.
Though bank issuance of fixed-rate debt and equity plummeted, floating-rate debt swelled 88% to $12.8 billion, or more than two-thirds of all bank debt issued in the quarter, according to Securities Data Co.
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What Investors Want
Analysts said the floating-rate debt was used mainly to fund increased lending by banks.
Thomas P. Gibbons, senior vice president at Bank of New York, said there was no mystery behind the preponderance of his bank's use of floaters -- it is what investors demanded. Most of the bank's $1.47 billion of debt issued in the second quarter was floating-rate debt, he said.
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"It has nothing to do with Bank of New York thinking interest rates are going up or down," he said. "I would just say that inyestor demand drove us."
Significant Jump
Of the 116 issues of senior bank debt in the second quarter, 81 were floating-rate notes. Floaters accounted for only 8% of total corporate debt issues in the quarter, according to Securities Data.
Total bank debt issuance, both subordinated and senior, reached $18.8 billion, up slightly from the first-quarter level of $18.7 billion. Total corporate debt issuance, by contrast, plunged 17%.
"Banks are trying to secure loan growth, and they need increased funding," said Mike Leit, a fixed-income financial institutions analyst with Prudential Securities.
And banks can match the floaters with swaps and hedge against the risk of rising interest rates, he added.
Ethan M. Heisler, a bond analyst with Salomon Brothers Inc., said: "As long as investors perceive that rates can continue higher, they will continue to look to floating-rate issues as a way to hedge against that risk."
The leading issuers of debt in the second quarter were: PNC Bank, $2.2 billion (all of it floating rate); J.P. Morgan & Co., $1.5 billion; NationsBank, $1.5 billion; Bank of New York, $1.47 billion; Comerica, $1.45 billion; and Society National, $1.35 billion. All other banks issued less than $1 billion.
PNC Bank Corp. started the third quarter by issuing $1 billion of floating-rate notes Tuesday through its PNC Bank unit.
Banks issued only $13 million of convertible debt in the second quarter, after issuing $247 million in the first period.
And while banks issued nearly $4 billion of subordinated debt in the first quarter, they issued only $1.47 billion in the second period.
The wave of floating-rate debt brought bad news to investment banking houses, since generally most floaters have earlier maturities than fixed notes, generating smaller fees.
As a result, while senior debt issuance rose nearly $3 billion in the second quarter from the first quarter, investment banking fees dropped to less than $6 million from $15.2 million.
total fees were also far down from the first quarter. In the second quarter, underwriting fees dropped to $46.6 million on total underwriting volume of $19.8 billion, from $81 million on total underwriting volume of $19.9 billion in the first quarter of the year.
Lehman Brothers maintained its No. 1 ranking in debt issues in the second quarter, underwriting almost 20% of all bank debt. CS First Boston followed, with 14.7%.
As expected, equity issuance was down in the second quarter, as many banks repurchased stock and increased dividends, rather than issuing new equity.
Just over $1 billion in equity was issued in the second quarter, or less than one-third the amount issued in the prior year's second quarter.
Morgan Stanley was the leading equity underwriter for the quarter and for the first six months. Goldman, Sachs & Co. was ranked No. 2 in the second quarter, while Merrill Lynch was in second place for the first six months.
Top Underwriters Of Bank StockSecond-quarter data;full credit tolead manager Proceeds Market (millions) shareMorgan Stanley $244.9 24.3%Goldman Sachs 227.5 22.6Merrill Lynch 175.0 17.4Lehman Brothers 150.0 14.9Bear Stearns 70.3 7.0Dain Bosworth 25.0 2.5Charles Webb 22.5 2.2Piper Jaffray 20.0 2.0J.C. Bradford 20.0 2.0Keefe, Bruyette& Woods 18.4 1.8Top 10 total 973.6 96.7Industry total $1,007.2 100.0%
Source: Securities Data Co.
Top Underwriters Of Bank DebtSecond-quarter data;full credit to leadmanager Proceeds Market (millions) shareLehman Brothers $3,697 19.6%CS First Boston 2,771 14.7Morgan Stanley 2,373 12.6J.P. Morgan 2,244 11.9Merrill Lynch 2,235 11.9Salomon Brothers 1,993 10.6Goldman Sachs 1,015 9.6Citicorp 495 2.6Donaldson Lufkin& Jenrette 409 2.6Deutsche Bank 194 1.0Top 10 total 18,305 97Industry total $18,817.7 100.0%
Source: Securities Data Co.
