After a long hiatus, major banks may again be gearing up to issue trust-preferred securities to take advantage of the low interest rate environment.
Issuance of trust-preferreds, the somewhat controversial securities that let banks raise regulatory capital inexpensively because of their favorable tax status, has slowed sharply in the past year.
In late 1996 and early 1997, banks became so overstuffed with capital that they issued the securities and then spent the proceeds to repurchase their own stock. "Banks issued perhaps a year and a half worth of trust- preferreds in just a month's time," said Jack Ablin, executive vice president and head of fixed-income securities at Barnett Capital Advisors Inc. "There was simply no need to issue more."
But now some of the biggest players in trust-preferred securities have stepped up to the plate again.
On Monday, Fleet Financial Corp. issued $120 million of trust-preferred securities, and two days later, Chase Manhattan followed with a $200 million deal.
Both deals were underwritten by Merrill Lynch & Co. and were greeted by fairly receptive bond investors, traders said.
With healthy demand still around, a modest uptick in issuance of the securities could be just around the corner, some market experts said.
"The securities still remain an attractive form of capital," said bank bond analyst Thomas Flynn of Morgan Stanley, Dean Witter, & Discover Co. "And because interest rates are low, more banks may be becoming more opportunistic."
Banks may also feel compelled to issue if Congress drafts and passes legislation that eliminates the tax-deductibility of the securities, which is the feature that makes them most attractive to banks.
The threat of such legislation drove many banks to issue billions of dollars worth of securities in 1996.
This week, reports have surfaced that the President's budget-scheduled to come out next week-may once again call into question the tax- deductibility of these securities.
Some experts, however, are doubtful. "People circulate these rumors about these securities every year about this time," Mr. Ablin said.
The market has guessed wrong on this point since legislation first was introduced in 1995. "So why would it come to pass in 1998?" Mr. Ablin asked. "If you are going to buy the securities, it's best to buy and hold as opposed to betting on legislative action."
Ratings agencies, however, say that large banks are not likely to issue many more trust-preferred securities. "It is possible, but highly unlikely," said ratings analyst Tanya Azarchs of Standard & Poor's. "Banks have stocked up on these securities-some of them above their limits. Many of them still have more of it that they can use."
