Wachovia Corp., a fairly infrequent issuer of debt into the capital markets, joined the fray on Monday by selling $250 million in 30-year notes.
With a 10-year put option, the latest issue from the Winston- Salem, N.C.-based bank follows issues of debt with similar structures in the past year by in-state rivals First Union Corp. and NationsBank Corp.
The structure generally reflects the belief among a number of bankers that coupon rates on bonds have reached a low point.
Investors demand a smaller coupon on a deal with a put option than they would for a straight deal that matures at the same time as the put, because the put option gives them greater flexibility.
Investors in the Wachovia deal, for instance, can exercise the put in 10 years to secure greater return in other investments if bond rates have risen. If bond rates fall below their current level in 10 years, investors can hold on to the Wachovia bonds until maturity, locking in greater return than they otherwise would get.
"Banks can reduce their initial funding costs at least to the put date," said a bank treasurer.
"The risk is that you have debt on your books that is relatively expensive money if rates are lower (at the put date)."
Banks seem prepared for this risk because of the currently low yield environment and high interest among investors, said Robert McCoy, Wachovia's chief financial officer.
"We were taking advantage of a time when both were in synch for us," he said.
John E. Mack, the treasurer at NationsBank, said that investors tend to drive the type, or structure, of deals in the market at any time.
"Most deals are driven by the supply as opposed to the demand," said Mr. Mack. "I don't think the banks are going out there and saying they want to do this."
Mr. Mack said that, for the most part, the risk of such debt deals is not outsize for any of the issuing banks.
"In the scheme of things," said Mr. Mack, "for NationsBank, Wachovia, and First Union, the amount of money doesn't have that much effect."
Wachovia's deal was priced at par to yield 6.605%, and is puttable at par in the 10th year.
The deal is priced at a spread of 47.5 basis points over Treasuries, and is rated AA-minus by Standard & Poor's Rating Group and A1 by Moody's Investors Service.
The deal closes out Wachovia's shelf registration with the Securities and Exchange Commission. To issue more debt, it would have to file a new notice with the SEC.
