After flocking to the capital markets earlier this year, banks held off issuing straight debt in the second quarter, a stance many capital market experts expect will continue in the second half.
In the second quarter, banks issued $5.16 billion of straight debt, off from $6.23 billion in the first quarter and $5.45 billion in the first quarter of 1995. At the same time industrial companies - all companies except utilities, financial institutions, and telecommunication firms - issued $27.1 billion, the highest-dollar amount of straight debt since 1993, Standard & Poor's reported.
Observers of the capital markets agreed that the decline in bank straight debt issuance has resulted from an uncertain interest rate environment and from banks' raising funds in other ways.
Bank bond analyst Katherine Rossow of Chase Securities Inc., said that although rates are good, pricing remains an issue with most banks.
"A lot of people who needed funding already did it," said Ms. Rossow. "February was a record month. But now everybody is afraid rates will go up."
Bank debt issuance - not including medium-term notes - fell 17% to $5.2 billion in the second quarter from $6.23 billion in the first quarter, said Diane Vazza, fixed-income director at Standard & Poor's.
Ms. Vazza also noted that the number of bank bond deals declined to 20 in the second quarter after 43 in the first quarter - just shy of the 46 deals in the record-setting first quarter of 1993.
Industrial bond issuance surged to 154 deals in the second quarter from 142 deals in the first.
In July, banks were particularly reluctant to issue straight debt. The handful of deals that have come to market this market include Banker's Trust's recent issue of $250 million in three-year senior notes; Lehman Brothers' $200 million issue of 30-year senior subordinated notes; and Wachovia Corp.'s $100 million Eurobond issue. Capital One Financial also came to market with $200 million in senior notes.
Few experts believe that the decline in straight debt issuance in the banking sector will stop.
One Citicorp executive noted that unless "there is major change in quality" bank issuance will remain constant.
Susanna Tisa, director of capital markets at Capital One and a former capital markets executive with First Interstate, said bank holding companies "are pretty much fully funded" and have been able to gain funding from securitization of credit cards or auto loans.
Banks are also turning to the less expensive medium-term notes, said Ms. Rossow. Although the issuance of straight corporate debt at banks has tapered off, the medium-term notes have remained "fairly steady."
"Medium-term note programs seem to be the way (banks) are going," she said. "That is what we expect to continue in the third quarter."
James Bianco, head researcher at Arbor Trading Group in Barrington, Ill., noted that bank bond issuance is less likely to rise, because demand is low.
"Stocks are king," Mr. Bianco said.
He pointed out that stock funds took in $140 billion in the first six months, while bond funds received less than $5 billion. Mr. Bianco conceded, however, that any more weakness in the stock market could cause money to start flowing back into the bond market.
"That is the hope," said Mr. Bianco, "and I use the word hope, because there is no evidence that money is coming back toward the bond market. ... But a few more bad days in the stock market and it may get here."