Banks Skip Market, Despite Low Rates
Although scores of nonfinancial companies have tapped the debt market this month, only one bank has joined the list.
The dearth of bank debt issuance puzzles some analysts. It suggests that banks are forgoing an opportunity to issue debt at the lowest interest rate level in years. Moreover, banks will probably curtail issuance for a few weeks later this month because they will want to release their third-quarter results before coming to market.
"If there is nothing in the next seven to 10 days, there might be nothing until numbers come out in October," said William King of Merrill Lynch & Co.
Corporations Jump In
Corporations issued $4.6 billion in debt in the first two weeks of September, compared with $5.9 billion in all of September 1990. But only one bank has issued public debt this month, and the $170 million it raised is small compared with the $650 million raised by banks and thrifts last September.
The lackluster showing comes when investors are far more sanguine about the outlook for the industry than they were in 1990. But bankers and analysts say there are valid reasons for the lack of capital markets activity.
Bankers see little reason to issue debt -- even at low rates -- if they do not have profitable ways to deploy the funds they raise. The sluggish economy is prompting many companies to defer expansion plans, and that leaves them with little interest in borrowing from banks.
As for investments, low short-term rates mean banks have few opportunities to invest the proceeds of any debt issues at rates approaching the interest cost on such issues.
Rates Could Go Lower
Also, bankers are not yet convinced that interest rates have bottomed. Even though rates are now lower than they have been all year -- the 10-year Treasury was trading at a yield of 7.63% Monday afternoon, compared with 7.93% at the beginning of the year -- few economists are predicting a dynamic recovery that would push rates back up. Banks feel no pressure to issue debt now, before low rates become a thing of the past.
"Banks are saying they're not sure we've seen a trough" in interest rates, said one money-center banker.
Low swap spreads are another factor deterring banks. The rate at which a bank could swap the fixed interest payments it receives on a 10-year debt issue for floating-rate payments is just 50 basis points over the London interbank offered rate.
As a result, a bank that issued 10-year debt at a fixed rate 100 basis points over Treasuries and swapped its interest payments into floating-rate obligations would have to pay Libor plus 50 basis points. If the swap spread were 70 basis points, the same bank would find itself paying Libor plus 30 basis points.
And finally, many banks that issued debt earlier this year as interest rates fell have little need to undertake additional offerings. Consider Republic New York Corp., whose treasurer, Thomas Robards, says the bank regularly raises new capital when market conditions are ripe even if it has no immediate need for the funds.
Republic was in the market for subordinated debt twice already this year, in May and June, and it raised a total of $200 million. Now, Mr. Robards says, "We've kind of filled up to the point where Tier 2 works for us."
Subordinated debt counts as Tier 2 capital under the new risk-based guidelines, but it can only represent up to half the total risk-based capital a bank reports.
To be sure, Banc One Corp. did come to market with a $170 million offering last Friday. And capital markets specialists say several banks are considering debt issues in the next several days.
But the Banc One transaction was tied to a prior agreement between Banc One and PNC Financial Corp. under which Banc One was to issue the debt to PNC as partial payment for four banks it purchased earlier in the year. Salomon Brothers Inc. then purchased the securities from PNC and reissued them in the public market.
And the other potential issuers are not new names. "Those same names have been lined up for a while," said Mr. King of Merrill.