synthetic put-and-call bonds to tap a lode of cheap regulatory capital. The synthetic securities - which made their debut more than a year ago - are cheaper to issue than 10-year subordinated debt with a put feature, capital market experts said. Industrial companies were the first to raise money with the new securities, and banks are now issuing them to build up their Tier 2 capital. The six largest underwriting firms had brought $3.5 billion of putable debt to market this year through March 3. Banking companies, including Amsouth Bancorp., Crestar Financial Corp., Union Planters Corp., and First Union Corp., have issued about $1 billion this year. "The market evolved because there are some investors who like corporate debt and others who like options," said Thomas Wurtz, senior vice president and assistant treasurer of First Union Capital Markets. "More banks and financial companies are likely to issue these instruments," said Christopher Lynch, managing director and head of the high-grade capital group at Donaldson, Lufkin & Jenrette Inc. "It is very inexpensive and a very efficient form of synthetic debt financing for financial institutions." Mr. Lynch emphasized that the securities "do not have the potential to flood the market like capital securities but they do provide financial institutions with a new instrument which they can compare with their traditional debt financing." The securities go by a variety of names, such as PEPPRs, price efficient par put remarketable securities; SPYS, synthetic putable yield securities; and PATS, pass-through asset trusts. First Union Corp. issued $200 million of 30-year PEPPRs last week at 78 basis points over comparable Treasury securities. Mr. Wurtz pointed out that First Union issued straight subordinated debt three weeks ago at the same spread but that it had received a 5% premium for the PEPPRS because of the call option. "It is difficult to see why the traditional put bond market would continue to see a lot of activity when you have a structure that accomplishes the same thing but at a lower cost to the issuer," Mr. Wurtz said. He explained that First Union sold swaptions, or options on swaps, to a third party. Then it issued debt, which in 10 years is called by the third party. The third party then has the right to call the 20-year portion of the bond from First Union at predetermined interest rates, he said.
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