Banks Resume Issuing Preferred Stock

After an August vacation, a few banks are testing the market for fixed-rate preferred stock.

H.F. Ahmanson & Co., Los Angeles, issued $175 million in fixed-rate preferred stock on Aug. 29, and a U.S. unit of Banco Santander is currently marketing a $150 million offering.

Meanwhile, Chase Manhattan Corp. filed a shelf registration in August to issue up to $250 million in preferred stock. And National Westminster Bank, the U.S. branch of National Westminster Bank PLC, is also rumored to be readying a new issue of its own.

Recent Dry Spell

The current pace is on target to match the $1.2 billion in preferred stock that banks issued during the first half of this year, said Jeffrey Peek, a managing director at Merrill Lynch & Co.

The pickup comes after several weeks when banks issued no preferred stock, according to Securities Data Co. In July, however, volume was $325 million.

The latest issues also coincide with low interest rates. That means banks can set dividend rates relatively low and keep their funding costs down. It also means investors are more willing to buy preferred stock because yields on lower-risk securities such as government bonds are unappealing.

Banks like to issue preferred stock because they can count it as Tier 1, or equity, capital under the risk-based capital rules. At the same time, issuing straight preferred stock that is not convertible into common does not dilute existing common shareholders' ownership.

Whether the new-issue activity can be sustained is unclear. Fixed-rate preferred stock is usually sold heavily to individual investors, and they have only a limited appetite for the securities, even if the yields are attractive.

"Across the board, the market is trading lower," said John McVeigh, a director at First Boston Corp. "In large part, all of these issues are being marketed to the same audience."

But institutional investors are starting to get more interested in buying preferred stock, particularly preferred shares issued by foreign banks. The tax code allows institutional buyers a 33.3% advance tax credit on dividend income from foreign issuers' preferred stock, so a share with a 7.5% dividend actually generates a gross yield of 10% - an additional 2.5% - for an institution.

"A fundamental change in this market is the significant increase in institutional demand for bank perpetual preferred," said Kinsey Marable, a vice president at Goldman, Sachs & Co. He said institutions now buy close to half of many new issues of preferred stock, up from about 10% a year ago.

Jack Frazee, chief financial officer of H.F. Ahmanson, said there was considerable institutional demand for his company's preferred issue, although individual investors ultimately bought most of the shares.

PHOTO : Preferred Stock Issuance Resumes Source: Securities Data Co.

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