Banks continued their rush into the subordinated debt market Thursday, raising more than a half-billion dollars by offering investors handsome premiums over Treasuries.
Thursday's issuers were Bank of New York Co., Citicorp, and Banc One Corp.'s Columbus, Ohio, unit.
Ending October Lull
They brought the total raised this week through subordinated debt offerings to more than $1.3 billion. This matched the amount raised by banks through issuance of all types of debt in October.
The rush to market follows a lull that preceded the presidential election, when the lack of demand from wary investors kept banks on the sidelines.
"Prior to the election, investor demand wasn't there," said Kenneth R. Stancliff, senior vice president and treasurer of First Union Corp., which issued $225 million in subordinated debt Tuesday. "We have a little window here, but if history holds true, it will close down in December."
Investors normally do not buy securities that month but instead look to take profits on their holdings before yearend.
This week's window of opportunity was opened by falling yields in the Treasury bond market. The yield on the government's 10-year note, the benchmark for most bank subordinated debt, had fallen about 10 basis points, to about 6.75% Wednesday, from the week before. The yield backed up Thursday, to 6.80%, but remained below week-earlier levels.
The combination of lower yields and renewed investor receptivity made this week attractive for banks to raise subordinated debt, which counts as Tier 2 capital, either for liquidity or to ensure that their units qualify as "well capitalized" under new regulations.
The premiums that banks must pay over Treasuries has widened sharply. For example, the spread on 10-year subordinated debt has widened to an average 124 basis points this month, from 94 in June and July, according to Moody's Investors Service.
However, bankers said those spreads have narrowed from what investors were demanding just before the election.
Mr. Stancliff, for example, said that, before the election, investment bankers told First Union it would have to pay 130 basis points over Treasuries. Tuesday, its debt was priced at a spread of 118 basis points.
Widening Spread Offset
Analysts said that, although spreads have widened, lower yields have cut the overall cost of issuance since summer.
"From June to November, there's been a widening of spreads," said John Lonski, senior economist at Moody's. "Borrowing costs are still lower today, though, than back in June."
The backup in yield on the Treasury's 10-year securities indicates that the window may be closing. And the banks that issued this week may have gotten in just over the sill.
"There's some uncertainty about where intermediate-term rates are going," said Charles Tysinger, chief financial officer of Central Fidelity Banks in Richmond, Va. It issued $150 million in subordinated debt Wednesday to ensure that its units have at least 10% total capital ratios.
