After False Start, South Trust Taps Markets
South Trust Corp. of Birmingham, Ala., has succeeded in raising equity capital after an earlier attempt fizzled.
The difficulties along the way exemplify the pitfalls that await infrequent securities issuers these days - even at sound banks run by savvy managers.
No obvious problems loomed in May, when South Trust registered to issue the new equity. The bank is seen as one of the strongest institutions in Alabama. Return on equity was 13.4% in 1990 and the Tier 1 capital ratio was a robust 7.13%. The bank's growth strategy also appears to be paying off.
But while the shares attracted enough bidders, the proposed offering sent the bank's stock price falling. As a result, the price investors were willing to pay for the new shares was not high enough, so South Trust withdrew them.
Market Sentiment Changes
Two months later, thanks to a more receptive market, the recent release of strong earnings and a smaller syndicate, the bank sold 1.35 million shares for over $33 million.
Shaken by the banking industry's current problems, bank stock investors are pickier than usual, and they are more prone to bid down the stock price of an issuer even if the deal is picture perfect.
With issues of bank equity more plentiful in May than all year, South Trust was just another face in the crowd.
"There was just too much supply out in bank issues," said bank analyst Frank Suozzo of S.G. Warburg.
But a problem of South Trust's own making stemmed from a decision to include all of the bank's key over-the-counter market makers in the underwriting syndicate over the objections of the lead underwriter, First Boston Corp.
"They wanted to be nice people and let their market makers in," said John Tehan, a partner at Simpson, Thacher & Bartlett, which was legal adviser on the deal.
Tripped by a Technicality
According to rules of the National Association of Securities Dealers, market makers must back off prior to distribution of shares they are underwriting. For two days, they cannot display bid and asked quotes or purchase stock already outstanding.
Market makers want to be included in syndicates because it allows them to pocket the difference between the bid and asked prices. And issuers want to include market makers to foster a relationship that pays off in support for the company's stock.
But South Trust went too far in the first offering by including all of its key market makers.
Volume, Price Collapse
"All the market makers had to withdraw from the market, and the volume and price of the stock just dropped through the floor," says Aubrey Barnard, South Trust's chief financial officer. He said that South Trust managers dismissed concerns about constraints on the market makers - until the price tumbled from $23.50 a share the day the shares were registered to $21.75. That's when the deal was pulled.
An official at First Boston pointed out that the deal was successfully completed in May, with all two million shares sold, but said South Trust's chairman was not satisfied with the price.
Two months later South Trust revived the deal after a boost from strong second-quarter earnings nudged the stock to $27 a share. However, the number of new shares was reduced and only three underwriters participated.
As is typical in any offering, investors worried about dilution of their holdings hurried to sell, and the price of the stock fell again. But ultimately, SouthTrust was able to place a total of about 1.35 million shares at $24.75 a share, well above the price in late May, and the deal took just two days to complete.
PHOTO : Off Again, On Again
