After a January hiatus, banks have returned to the capital markets with a spate of tightly priced new bond issues.
BankAmerica Corp. came to market last week with its lowest-priced issue to date, $250 million of 10-year subordinated debt. Citicorp, Norwest Corp., and Chase Manhattan Corp. also sold bonds at unusually favorable prices in the last week.
Analysts said the banks were fulfilling their funding needs, taking advantage of extremely low rates, and benefiting from positive fourth- quarter earnings.
"The banks are getting pretty cheap money," said David Hendler, a bank bond analyst at Smith Barney.
But observers also noted that spreads on all the issues had widened from the initial pricing, an indication that the issuers had priced the deals more cheaply than the market would bear.
If investors perceive risk, they demand a greater spread over comparable Treasury securities before they will buy.
Banks were dictating the terms of the new issuance, analysts said, coming to market at very cheap prices. But one bond trader deemed the pricing "ridiculous," suggesting that banks' expectations were unrealistic.
Chase Manhattan brought a five-year issue to market at a price of 31 basis points over the comparable Treasury security. The spread later widened to 40 to 42 basis points.
BankAmerica issued bonds in both the European and U.S. markets in rapid succession.
The San Francisco-based bank company issued $300 million of seven-year, floating-rate Euronotes priced at 12.5 basis points more than the three- month London interbank offered rate.
That deal was quickly followed by $250 million of 10-year subordinated notes that were priced at 57 basis points more than Treasuries. The spread on that issue later widened to 61 basis points.
The cost to BankAmerica for its U.S. issue was the lowest ever for the bank, with a total cost, including fees, of 65 basis points over Treasuries. The next cheapest deal for a 10-year issue had cost 72 basis points.
Even at the wider spreads, the issues indicated strong confidence in the banking sector.
After several quarters of steady earnings, banks are considered a safe investment, analysts said.
"The majority of the large issuers are not getting into significant trouble with their consumer loans. The outlook remains positive," said Ethan M. Heisler, a bank bond analyst at Salomon Brothers Inc.
Michael Leit, a bank bond analyst at Prudential Securities, said investors have put banks in the same league as utilities, noting the stability of their earnings and low likelihood of default.
