Comerica Inc. recently came to market with an issue of $250 million in adjustable-rate preferred stock that has an unprecedented fixed-rate term of five years.
The offering, one of the largest adjustable-rate preferred issues, is "the beginning of a new trend toward restructured capital by regional banks, who have formerly not used preferred stocks in their capital structures," said Rick Schwartz, principal from Morgan Stanley & Co., one of the underwriters of the deal.
The issue was priced at 12.5 basis points over five-year Treasuries and rated BBB-Plus by Standard and Poor's.
Recent issuers include Citicorp, which issued $125 million, Fleet Financial Group, which issued $100 million, and Bank of the West, a privately held institution that issued $75 million.
Comerica said its offering would help fund the company's recent buyback program and other general purposes.
"It also creates another level of Tier 1 equity," said Ronald Marks, first vice president and liability manager. "It fits our structure quite nicely."
Mr. Schwartz said the preferred stock appeals to insurance companies, money managers, and other financial institutions. It qualifies as a dividend-received deduction issue, which increases the after-tax return to investors.
According to Morgan Stanley, the preferred market issued $16 billion of debt in 1993, of which 96% qualified for the dividend-received deduction. When the preferred market fell to $7 billion in 1994, only 44% was eligible for the favorable tax treatment. Last year, the market was $12 billion, and 10% qualified for the deduction.
Industry experts said that the market's withdrawal was caused by interest rates. They said the shorter duration of the Comerica issue makes it less vulnerable.
Bank bond analyst Ethan M. Heisler of Salomon Brothers Inc. said the market for fixed-term, adjustable-rate preferred stock "is small and I don't see how it will grow."
He also said the issue is trading much cheaper than it should. Mr. Heisler said investors may be wary of the five-year call feature.
"Citicorp and Fleet didn't sell so well because the structure is very complicated and there are a limited amount of buyers," he said.
