HONOLULU - When it comes to trust-preferred securities - the hybrid instrument that became a favorite regulatory capital-raising vehicle for banks in the mid-1990s - the bloom has been off the rose for some time.
The crisis in the financial markets during the late 1990s left institutional investors with little taste for these debt instruments, after their callable feature prevented investors from keeping up with a rally in the 30-year Treasury market.
This year, when some previously issued securities started trading below their original price, retail investors, who had been favored over institutional investors in some circles, lost their appetite for the securities.
One illustration of the dicey environment for banks considering raising capital through trust-preferred securities: As of Tuesday only $2.6 billion of new securities had been issued this year, according to Thomson Financial Securities Data. However, the Dutch banking company ING Group has priced a $1.5 billion trust-preferred issue.
Still, banking companies have managed to squeeze out a few deals this year. On Dec. 5 BancWest Corp. came to the market with a sizable deal - $150 million of trust-preferred securities to finance its acquisition of the 30 Nevada and New Mexico branches divested by Wells Fargo & Co. and First Security Corp. as a result of their merger. Goldman Sachs Group Inc. led the deal.
And the parent of First Hawaiian Corp. of Honolulu and San Francisco's Bank of the West is keeping its options open for future issues. Last week it filed a shelf registration for $300 million of securities, half of which were issued on Dec. 5. Chief financial officer Howard Karr said the rest of the registration will be drawn down at some unspecified date to finance "future growth or acquisition."
BancWest is also planning a 10-year senior subordinated issue of $50 million through Bank of the West, Mr. Karr said.
Eric Grubelich, chief credit analyst at Keefe, Bruyette & Woods Inc., said, "It's not unusual, but it's difficult" to bring trust-preferred transactions to the current market. "Institutional investors are less attracted to these securities at the present time, and spreads are at fairly wide levels."
The Keefe Trust Preferred Index, which measures the spread on these securities, has risen 116 basis points from last year, to 316 basis points over Treasuries.
Pushing up spreads on trust-preferred securities, which makes them more expensive for banking companies to issue, are some factors outside their control: Wider yields on all corporate bonds over the last two years; an inverted yield curve this year; and more recent concerns about a slowing economy, which have negatively impacted longer-term bonds.
Trust-preferred securities typically have 30-year maturities with a call option.
Like other banking companies, BancWest appears to have gotten around some of the dissatisfaction by institutional investors for these issues by tapping the retail market.
Elsewhere, Bank One Corp., Chase Manhattan Corp. and FleetBoston Financial Corp. have issued trust-preferred securities this year. The debt vehicles have been sold to retail investors, who are generally seen as less concerned about the drag of the securities' call option on the issue's overall return.
