Elbowing their way into the debt underwriting business, bank capital market units launched several aggressively priced deals on Thursday.
"There are some indicators that some of the new bank entrants have at times been even more competitive than the traditional Street players," an analyst at one Wall Street firm said, noting heated bidding for various corporate deals.
NationsBank Capital Markets led a $150 million deal for Ford's Associates Corp., and Citicorp and CS First Boston led a $300 million deal for Travelers Corp. Experts said the pricing on both deals was unusually cheap for the issuers.
Among the companies to benefit from the competition was Norwest Corp., which issued debt through a consortium of underwriters that included several banks.
Norwest's $200 million issue of seven-year senior debt, led by Morgan Stanley & Co., was priced at 43 basis points over comparable Treasuries, a full 8 basis points cheaper than expected. Analysts said the involvement of banks in the underwriting team played a big role in the below-market pricing.
A bond analyst at a bank said aggressive pricing by bank underwriters is potentially damaging because it creates the appearance of buying market share.
"The banks don't have a franchise with these names and these companies," said another analyst at a Wall Street firm. "Pricing then becomes a competitive tool."
To be sure, some analysts took exception to the suggestion that banks are the main source of the current tight pricing.
Some pointed out that Lehman Brothers has long been known as a particularly aggressive competitor.
"Of course, it's the investment banks that are saying that" about banks forcing tight prices, said an analyst. "It was Lehman's game for years. It's not the banks that are causing pricing" problems.
"You could make a general comment that there's a fair amount of competition in the market right now, but it's always been a competitive marketplace," said a bond analyst with a relatively recent entrant into the market.
Indeed, analysts said that underwriters step up their efforts to land deals after Labor Day.
"Usually in the fall, spreads on these deals tend to widen," said a Wall Street analyst. "It's a seasonal thing."
The end of the quarter tends to bring more competition as underwriters look for deals to bolster their position in the league tables.
Whatever the cause, competitive pricing creates opportunity for debt issuers, including banks.
A Northern Trust issue of $100 million of 10-year subordinated notes, led by Goldman, Sachs & Co., was priced on Thursday at 60 basis points over Treasuries, or about 5 basis points tighter than expected.
"It's very good for the borrower," said an analyst, "because it takes some of the profit of the underwriter out."
Competitive pricing has encouraged banks to come to market, and might continue to do so until spreads in the whole sector widen out, said analysts.
Referring to the current state of competition, one analyst said, "It waxes and wanes. Generally speaking, it's pretty much of a cut-throat business."
