First Chicago Corp. on Wednesday issued $150 million in floating-rate debt with minimum-rate protection, becoming the third bank this month to tap demand for this type of security.
The 10-year subordinated debt issue floats at 12.5 basis points over the three-month London interbank offered rate, with a 4.25% minimum yield, called a "floor." First Boston Corp. was sole manager.
The first offering this year came from Chase Manhattan Corp., which issued $150 million earlier this moneth. A $150 million First Union Corp. issue followed last week.
Banks have called billions of dollars of floored floating-rate bonds in recent quarters, and a few large investors want to replace these issue.
Banks issue floating-rate debt to match-fund floating-rate assets and cushion earnings from changing interest rates.
The floors are an addition aimed at luring investors.
Investor interest has been so strong that banks using this structure have obtained cheaper funding than if they issued fixed-rate debt and swapped into a floating-rate payment stream -- a more common way of raising floating-rate money.
For Chase, the saving was 10 to 20 basis points, market sources said. The amount of First Chicago's saving could not be determined.
The issues are aimed at a limited number of investors. A single midwestern investor bought at least two-thirds of one issue, capital markets sources said.
Because of the limited number of investors, a flood of similar issues is unlikely.
"I'm surprised at how much volume we've seen," said one capital markets official. "It remains to be seen how big an appetite these few investors have."
A buyer of a floored floater accepts a lower initial rate than on a fixed-rate security but expects that rising rates in the future will increase the yield over the term of the security.
Hints of a Rate Rise
Recent comments by Fed officials, including Chairman Alan Greenspan, have led investors to believe that rates have bottomed and that the next change in monetary policy will be to raise short-term rates.
Also on Wednesday, Mellon Bank issued $250 million of 12-year subordinated notes. The noncallable bank notes were priced to yield 6.55%, 80 basis points above the 10-year Treasury note. Rated A3 by Moody's Investors Service and A-minus by Standard & Poor's Corp., the issue was lead-managed by Kidder, Peabody & Co.