Banks could be gearing up to issue a substantial amount of subordinated debt as the economic environment becomes more favorable, bank bond analysts said.
In recent months U.S. domestic banks have issued little subordinated debt-primarily because they are still stuffed with capital from their issuance of trust-preferred securities during the past year.
However, the climate has become favorable enough to attract some financial giants off the sidelines.
"I'm not calling for a deluge of issuance," said Joseph Labriola, the head of corporate bond research at PaineWebber Inc. "But there will be a fair amount of issuance. There will be issuers that step up to the plate because the technicals are so good."
Some factors behind the favorable environment for issuance include expectations of strong third-quarter earnings at banks and the belief that interest rates will remain favorable.
Other factors include the improving swap rate and fixed rate, which enable banks to issue securities cheaply.
Mr. Labriola said the fixed rate for 10-year subordinate debt has tightened 3 to 5 basis points since summer, while swap rate spreads are considerably wider than they've been all year.
Bankers Trust New York Corp. and BankAmerica Corp. took advantage of the climate last week, issuing $200 million and $250 million of subordinated debt, respectively.
In other news, investors reportedly are passing on the new bonds expected to be issued by a minority-controlled subsidiary of Republic New York Corp.
Safra Republic Holdings SA of Luxembourg plans to issue $250 million in 1,000-year securities, which offer investors from 7 to 14 basis points more in yield than 100-year bonds.
Lehman Brothers, the underwriter on the issue, is placing the privately.
Market sources, however, say that the issue is slow to sell and that Lehman officials had to offer investors and extra 5 basis points raising the yeild margin to 0.97 points.
Investors worry that the securities, which are called debt but look like equity, could draw fire from the Treasury Department. Others fret that the maturity will be hard to explain to customers.
"I think the security will raise some eyebrows from regulators," said one bond investor. "And bond investors will probably have problems with it. If the security falls into the category of equity, it will not get favorable tax treatment."
Lehman officials were unavailable for comment.
