Chase Manhattan Corp. shelved a $500 million debt deal Tuesday because of eroding conditions in the bond market, sources said.
Chase had been poised to issue the 10-year global notes since last week. The market for corporate debt had roared back from abysmal lows, and investors seemed to be chomping at the bit for bank securities.
But on Monday, the market took a turn for the worse. Spreads-the difference between corporate bond yields and those of Treasuries-on bank bonds began to widen as investors grew anxious about the swoon in the U.S. and overseas stock markets.
Sources said investment bankers for Chase were hoping to place the notes at 115 to 118 basis points over Treasuries. As the spreads on bank bond debt and other corporate debt began to widen on Tuesday, investment bankers tried to make the price more attractive by offering the notes at 125 basis points over Treasuries.
Investors, however, failed to bite at that price, meaning it would be too costly for Chase to sell.
"Chase tried to get too cute with the pricing," said one bond expert who declined to be identified. "That deal was too large to be priced so aggressively. In this market issuers have to price cheaply. Chase didn't, and shot themselves in the foot."
Other experts said that Chase was simply caught in the unpredictability of a capricious market. Chase planned to issue the debt because conditions had become too favorable not to, sources said. As market conditions improve, Chase is likely to reoffer the deal, they said.
A Chase representative declined to comment.
Placing a deal on Tuesday also proved difficult for BankBoston Corp., which brought to market $250 million of subordinated debt. Investment bankers planned to offer the deal at 150 to 155 basis points over Treasuries, but were forced to sweeten the price by 30 basis points to attract investors.
The unplugging of the Chase deal and BankBoston's difficulty in placing its debt could dampen banks' enthusiasm for issuing debt.
Bank bond issuance had hit rock bottom in November, when only $5.3 billion in subordinated and senior debt came to market, according to Securities Data Co. But market experts said they were optimistic that that trend was likely to change.
Commercial banks issued $7.9 billion of subordinated and senior debt in October and $10.8 billion in September. But "one cannot expect the market to glide back to where it was," said bank bond analyst Eric J. Grubelich of Keefe, Bruyette & Woods Inc. "There is going to be some wind sheer along the way."
Still, many bond analysts expect bank issuance to increase because the bond market is improving, and funding needs for some banks have become more pressing.
"We are expecting more supply in the next couple of weeks," said bank bond analyst Katherine Rossow of Chase Securities Inc. Bankers "do not have enough confidence in the long-term market to postpone issuing debt. Why take the risk that something could go wrong with the economy next year?"
Joseph J. Labriola, head of the corporate bond research department at PaineWebber Inc., said that many banks need to replenish regulatory debt that is being extinguished because of amortization.
When debt amortizes it tends to remain on a bank's balance sheet, but ceases to qualify as total capital, a cushion that banks need during economic hardship.
"There was a lot of issuance of seven- and 10-year paper in 1991, 1992, and 1993, which is or is about to amortize as we approach 1999," Mr. Labriola said. "From a regulatory perspective, it is important that banks pre-fund that debt as it rolls off."
It has become more pressing for some banking institutions to raise capital because of the rash of mergers and acquisitions, the analyst added.
Banks held off issuing debt primarily because of the meltdown in the capital markets. Turbulence in the global economy forced bank bond spreads to levels that not seen since 1994. Investors also dumped securities because economists were warning of a recession in 1999.
"There is no question that investors were boycotting the market," Mr. Labriola said. "However, in the last several weeks we have seen a lot of finance companies and industrial companies issue debt cheaply, and investors have been running to grab it. Banks likely will follow with deals next year."
