Aggressive Pricing a Trap?
Competitive Bidding Raises Questions
Are bankers developing overconfidence?
A couple of signs suggest that they are.
First Interstate Bancorp and Mellon Financial, a subsidiary of the Pittsburgh's Mellon Bank Corp., recently geared up to issue new debt by giving the business to investment bankers selected on the basis of competitive bidding.
Mellon successfully raised $100 million, while First Interstate postponed its offering. But, regardless of success or failure, willingness to employ competitive bidding is a sign that bankers are growing accustomed to investor enthusiasm.
Ordinarily, banks turn to competitive bidding only when they are sure that investors will snap up new securities. The option was not readily available in 1990, when investors were a lot harder to find.
But this year's prolonged rally in bank securities has persuaded some bankers that the market will be more receptive to new issues, even if they are aggressively priced.
"They think [investors] are going to throw money at them because there are not a lot of deals out there," said one capital markets specialist.
Nevertheless, most issuers are not ready yet to embrace a competitive bidding process. They worry that an overly aggressive rate on a new issue could sour investors on any future offerings.
"You take a bit more risk doing a competitive deal," said Alan Pabst, treasurer of Wells Fargo & Co. "You could get a good price, but your bonds could trade poorly in the after-market which could hinder your ability to do deals in the future."
Issuing Rates Get a Preview
When bank officials are considering whether to issue new debt, they contact a number of investment banks and ask for general indications of the rates they think the bank will have to pay. The officials then review the indications and select a lead manager to orchestrate the underwriting.
The underwriters buy the securities from the bank at a predetermined price and resell them to investors.
"We get a lot of the advantages of competitive bidding, but we retain a lot of the flexibility," one banker said.
Investment bankers are not fond of the competitive bid structure because it forces them to bid aggressively.
On the Mellon offering, for example, lead manager First Boston Corp. won the underwriting business, but its fees were just $5.20 per $1,000 - well below the $6.50 to $6.75 that has been customary on bank debt offerings.
First Boston priced a $100 million offering of Mellon's 10-year subordinated debt at a yield of 9.25%, just 145 basis points over comparable Treasuries.
But some capital markets specialists said the deal's aggressive pricing would have made the issue a hard sell were it not for a decline in the long-term Treasury bond market that dragged along bank bond prices.
First Interstate solicited bids from investment bankers during the week of Aug. 12, the same week the bank filed details of its second-quarter results with the Securities and Exchange Commission.
Opted to Wait
But on the morning of Aug. 16, after reporters and analysts reviewed the SEC filing, news stories predicted that First Interstate would have to take a restructuring charge in the third quarter.
Faced with negative publicity at the precise time it was trying to sell new securities, First Interstate opted to wait and issue bonds later.
Officials at Mellon and First Interstate declined to comment on their debt-issuing procedures.