First Union Corp., facing Wall Street skepticism, has had to pay investors a hefty premium on its $350 million of bonds that started trading on Tuesday, analysts said.
The Charlotte, N.C., banking company priced the five-year bonds on Monday at 129 basis points above comparable Treasuries. That was as much as 7 basis points above comparable First Union bonds trading on the secondary market, according to varying price reports from trading desks.
"They had to be fairly conservative in their expectations in bringing the deal to market," said Van Hesser, an analyst for Goldman Sachs Group. "Investors knew they could hold out for a little bit more. It's the kind of name that people might otherwise pass on if they try to be aggressive in terms of pricing."
First Union's stock has been hammered by investors, partly because of operational snafus from its integration of CoreStates Financial Corp. and Money Store, which led the company to revise its 1999 earnings estimates twice this year. Some of the ill feelings have washed over to the bond market.
"The issues surrounding First Union impact shareholders more than bondholders," Mr. Hesser said. "Nevertheless, that gives bondholders a little more leverage in extracting a couple of more basis points out of the company."
"It's a name not everyone on the Street is in love with because of the earnings disappointments," said Scott O'Donnell, an analyst for J.P. Morgan & Co. But "it is still a pretty good company."
Indeed, First Union has sound credit quality and is well capitalized. Standard & Poor's Corp. gives the five-year bonds an A, and Moody's Investors Service an A1.
On reaching the secondary market on Tuesday, the yield on the new paper moved lower, to a 126-point spread above Treasuries, following a market rally for corporate bonds.
First Union also was penalized for the relatively small size of the issue because some investors see it as less liquid than some of the big global corporate issues.
Bank of America five-year bonds were trading at 112 on Tuesday, according to an analyst, while Citibank was trading at 113, J.P. Morgan at 115, and Wells Fargo & Co. at 114.
Bonds are being penalized by heavy issuance. In the nonbank sector, DaimlerChrysler Corp. floated a $4.5 billion global issue on Tuesday, with a tranche of five-year bonds pricing at 115 basis points above Treasuries. A flood of issuance is still expected by the end of the third quarter, which puts upward pressure on yields.
"The buyers are just waiting," said John Otis, an analyst for Bear, Stearns & Co. "They know there's a heavy calendar. They are just waiting for the new issue."
The bank and other issuers also have to contend with expectations of another interest rate hike by the Federal Reserve's Open Market Committee on Aug. 24, leaving investors happy to play a waiting game.
