First Union Corp. and KeyCorp have issued subordinated debt to infuse funds into subsidiary banks so that they meet new requirements for well-capitalized banks.

Meeting the Federal Deposit Insurance Corp.'s requirements for well capitalized -- 10% total capital ration, 6% Tier 1 ratio, and 6% leverage ratio -- will allow the banks to pay the lowest deposit insurance premiums and to bid for brokered deposits without regulatory approval.

The issues by First Union and KeyCorp were among $1.1 billion in subordinated debt sales by banks in the last two weeks. Subordinated debt counts as Tier 2 capital.

The parade of issuers mostly comprised regional banks, including First Bank System, Minneapolis; Fleet Financial Group Inc., Providence R.I.; and Society Corp., Cleveland.

Chase Manhattan Corp., New York, was the only money-center company to tap the subordinated debt market in the period.

As Good as They Get

First Union issued $250 million of 10-year subordinated debt through First Boston Corp. The offering was priced to yield 8.14%, or 90 basis points over Treasuries.

"The spreads are as good as they've been in an awful long time," said Kenneth Stancliff, treasurer.

First Union's previous subordinated debt offering was priced at 165 basis points over Treasuries, he said. Proceeds will add liquidity to the parent company, he said.

First Union earlier downstreamed about $350 million to subsidiary banks so that they could meet the requirements for "well capitalized banks." A portion of the proceeds from the offering will be used to replace the funds downstreamed to the subsidiaries.

KeyCorp issued subordinated debt in connection with its pending purchase of branches from BankAmerica Corp., said Lee Irving, treasurer.

Proceeds will be downstreamed to KeyCorp's Washington subsidiary to raise its capital levels, said Mr. Irving.

The Albany-based banking company issued $125 million in 12-year debt, through Merrill Lynch and Salomon Brothers last week. The bonds were priced to yield 8%, 85 basis points over Treasuries.

The Price Is Right

Low yields around the 10-year maturity, the usual term for subordinated debt, are attracting issuers, bankers said. Yields on 10-year U.S. Treasury securities have fallen 23 basis points since May 21, to 7.15% on Friday.

"The general cost level now is attractive for subordinated long-term capital," said Richard Pannone, treasurer at Fleet.

Besides low yields, bank issuers are also benefiting from narrower yield spreads to Treasuries. The thinner spreads to government securities indicate increased investor confidence in banks.

Fleet issued $250 million in 12-year subordinated debt last week. The issue was priced by-Salomon Brothers Inc. to yield 8.24%, 99 basis points above Treasuries.

Some Refinancing Set

Mr. Pannone noted that in January, Fleet paid 8.7%, equal to 159 basis points over Treasuries, for an issue of 15-year subordinated debt.

Some of the proceeds of last week's offering will refinance debt maturing later this year, said Mr. Pannone.

Chase issued $200 million of seven-year subordinated notes, yielding 8%, or 117 basis points over Treasuries. The size of the offer was increased $50 million by underwriters led by Salomon Brothers.

The spread paid by Chase is a sharp improvement from its last subordinated debt issue in November 1991. Chase last November raised $150 million of 10-year subordinated notes at a yield of 9.75%, or 223 basis points over Treasuries.

Society Corp. issued $200 million of 10-year subordinated notes, priced to yield 8.13%, 89.5 basis points over Treasuries. Goldman, Sachs & Co. was lead manager.

First Bank System issued $125 million in 12-year subordinated notes through J.P. Morgan Securities. The notes were priced to yield 8.02%, a spread of 85 basis points over Treasuries.At a GlanceRecent subordinated debtofferings by banks Amount Term Yield in in at millions years issuanceFirst $250 10 8.14%UnionFleet 250 12 8.24Chase 200 7 8.00ManhattanSociety 200 10 8.13First 125 12 8.02SystemKeyCorp 125 12 8.00Source: Dow Jones

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