Banks Issue Fewer Bonds; Trend Likely to Continue

Bank bond issuance tapered off in November and is not expected to pick up again despite falling interest rates.

Banks issued $7.2 billion worth of debt in November, off from $11.6 billion in October.

Some market sources note that there are few reasons for banks to go to the capital markets, since loan growth is sluggish and profitability is high.

"I think everybody feels very good about funding levels and isn't encouraged to go out and issue bonds," said John Mack, treasurer of NationsBank Corp.

Mr. Mack added that banks are also taking advantage of lower than normal credit costs in recent history.

"If there is no fundamental reason to use the money, then you're not going to issue paper into the debt market," he said.

Some market sources said that the frenzied issuance of new trust securities - Quips and Toprs - is partially responsible.

"You can not issue this quantity of (preferred) debt without some impact on the bank bond market," said bank bond analyst Katharine Rossow of Chase Securities Inc.

NationsBank issued $600 million of the tax-advantaged securities last week. Market sources expect roughly $2 billion in Quips and Toprs this week.

Quips or Toprs are the only securities that enable banks to meet tier I capital requirements and take a tax deduction on the proceeds - making it one of the most inexpensive ways for the banks to raise regulatory debt.

Ms. Rossow said that standard debt issuance by banks and preferred securities should have little effect on each other because they appeal to different investors.

However, she noted during the most frenzied issuance of the hybrid preferred security two weeks ago corporate bond spreads widened by six basis points - the widest in months - then tightened up again.

Bank bond analyst Eric Grubelich of Keefe Bruyette & Woods said that spreads widened because the market was uncertain about the impact of the new preferred securities.

"There was some concern that this would worry the bank bond market and that there might be some selling pressure in portfolios." said Mr. Grubelich. "But there wasn't a lot of selling."

Stanley August, the bank bond analyst at NationsBanc Capital Markets, said that banks are paying more for the new type of security in order to take advantage of the tax deduction.

"In that sense they can't pass this up," he said. "Once they are told they have to act fast."

The deluge of preferred issuance by banks appears to be depressing spreads on similar instruments offered by insurance companies, he said.

Emanuel J. Friedman, the chairman of Friedman Billings Ramsey & Co., said that he expects bond issuance for thrifts to climb because thrifts can issue bonds at the holding company cheaper than this type of paper.

"We have had greatest rally in the Treasury, and lower rates will encourage the issuance of paper," he said noting that the long bond fell to 6.4% from 7% between Sept. 23 and late November.

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