Marita Bank Ltd.-the largest bank in Finland-is preparing to join a growing list of foreign banks issuing hybrid securities, known as step-up perpetuals, in the United States.
Some observers say that a glut of such deals in the pipeline could jolt the U.S. domestic bank bond market, which has been sluggish lately.
Like capital securities that flooded the market last year and early this year, step-up perpetuals enable foreign banks that issue in the U.S. market to shore up their regulatory capital.
Marita Bank's Tier 1 capital is slightly too low - at 6.6%-for it to be considered well capitalized by its regulators, analysts said.
Late last month Paris-based Societe Generale issued $800 million of step-up perpetuals, and National Bank of Canada issued $300 million.
The issuance "shows that (foreign) banks are following the lead of U.S. banks and seeking ways to find Tier 1 capital," said bank bond analyst Charles Mounts of UBS Securities Inc.
"We have already seen issues out of several countries, and it is likely that other banks in those countries are likely to issue, while (banks in) other countries could issue."
The $250 million Marita issue is a five-year step-up perpetual. The bonds are expected to be priced at the five-year Treasury rate plus 95 basis points. The rate would step up to Libor plus 225 in five years. The deal, which is being led by Merrill Lynch & Co., is expected in two weeks.
Investors flock to the bonds because of the high yields and quality of the credit, analysts said.
"So far the supply has been pretty well absorbed by the market, but spreads could come under pressure if there is a high level of supply," said Mr. Mounts.
Pressure most likely would be felt in spreads of other hybrid securities issued by foreign banks, he noted.
In recent weeks investors in Yankee bonds-bonds issued by foreign banks into the U.S. market-have become antsy over the meltdown in Asian banks.
The rush to buy bonds issued by banks in other countries is a flight to quality, said one trader who declined to be identified.
Traders also expect the supply of domestic bank paper to take a hit. Bank bond issuance has been particularly sluggish, and most experts don't expect to see heavy issuance this month.
Banks' issuance in August was a meager $11.9 billion, off from July's unusually heavy issuance of $19.1 billion, reported Securities Data Co.
Traders also noted that nervousness still pervades the market. On Tuesday an East Coast dealer dumped $500 million worth of corporate paper, $140 million of which was bank and finance company bonds.
This dealer, in what traders call a "spread play," moved into Treasuries until a fresh supply of corporate bonds arrives.
The bonds sold included $10 million of five-year Salomon Brothers Inc. bonds, $10 million of five-year Wells Fargo & Co. paper, and $10 million of five-year Bank of New York & Co. paper. u