The bond market rally enabled BankAmerica Corp. on Monday to increase a preferred stock offering at a lower-than-expected cost.

BankAmerica originally planned to raise $300 million through the offering, with price talk putting the dividend yield at 8.375%, investment bankers said.

The offering was expanded to $400 million, and the dividend yield was cut by 21.5 basis points, to 8.16%. Merrill Lynch & Co. was lead manager.

Fueling the Rally

Preferred stock has no maturity, and dividend yields are based on yields of the Treasury's 30-year bond. A bond rally was sparked by a weak employment report for June and the Federal Reserve's subsequent's cut in short-term interest rates last Thursday.

The 30-year Treasury dropped 12 basis points to 7.63%, giving BankAmerica and its underwriters the opening to reduce the dividend, investment bankers said.

"Their timing is perfect," said one investment banker.

In February, BankAmerica sold $365 million of preferred stock. The dividend yield on that issue was 8.38%.

BankAmerica has been strengthening its balance sheet since it purchased Security Pacific Corp. in April.

Ratio Expected to Rise

The company has raised a total of $900 million in capital since last week. Besides Monday's issue, the bank sold $500 million of subordinate debt.

Preferred stock qualifies as Tier 1 capital, and subordinated debt counts as Tier 2 capital.

The bank's ratio of total capital to risk-based assets was 10.8% after the Security Pacific purchase, and this ratio was expected to rise by another 40 basis points with the bank's plans to issue subordinated debt and preferred stock, according to Fitch Investors Service Inc.

Late last week, BankAmerica diversified its funding by issuing $300 million in five-year floating-rate notes in the Euromarkets via Kidder Peabody International. In Europe, too, the bank benefited from lower interest rates.

The issue cost BankAmerica the three-month London interbank offered rate, which stood at 3.69% late last week, plus 48 basis points. This spread includes underwriting fees.

A similar offering in February by BankAmerica was sold at Libor, then 4.05%, plus 60 basis points, also including underwriting fees.

"All in all it's not a bad deal for BankAmerica," said an investment banker. By opting for floating-rate notes in the Euromarkets, BankAmerica can get a competitive rate and expand its investor base.

"They have an interest in tapping any pocket of investors who are out there," he said.

As occurs frequently in the Euromarkets, last week's issue will be combined and trade together with the February issue.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.