A new type of security being issued by banks has triggered a feeding frenzy among institutional investors who fear the opportunity to buy the attractive debt may be brief.
Institutional investors jammed the phone lines last week waiting to snap up $5 billion worth of quarterly income preferred securities, or Quips, issued in private placements by 13 banks.
In just two days, $3.6 billion worth of Quips were sold - many of the deal oversubscribed, said market sources. Market sources said they expect $5 billion more to be sold in the next two weeks.
Issuing Quips is one of the most inexpensive ways a bank can raise regulatory capital, because the proceeds are tax deductible.
One reason for the rush is the worry on the part of some investors that the Corporate Welfare legislation, tabled last year, may eventually rule out the tax break.
One fund manager calculated that a $450 million issue of Quips would cost the government $16 million in lost tax revenue, assuming the security offered a tax-free yield of 8.08%, or $36 million. He argued that the Internal Revenue Service may ultimately overturn the tax-free status.
"People turned to the private placements because they are afraid that they won't get registered when the IRS changes the tax code," said rating analyst Thomas Stone, of Duff & Phelps Credit Rating Co.
Chase Manhattan Corp. sold $300 worth of privately placed Quips on Friday.
"We feel we have reinvented a market because we have taken our retail- oriented Quips product, and in the course of a week, have restructured the product to appeal to institutional investors," said Christopher Hogg, an investment banker with Goldman, Sachs & Co.
Since the Federal Reserve allowed banks to issue Quips in October, a bevy of financial institutions, including Chase Manhattan, Wells Fargo, and BankAmerica Corp., filed with the Securities and Exchange Commission to issue $10 billion worth of the securities.
Initially, the security was sold to a predominantly retail market, an investment banker said, referring to the Chase Manhattan deal, which was the only public deal sold.
Private-placement deals enabled banks to come to market faster and reach institutional investors, which is slightly less costly, said the investment banker.
Institutional investors are rushing to snap up the securities because they are attractively priced, said fixed-income fund manager Jack Ablin for Bank of Boston Corp.'s private bank, who attempted to buy $5 million of Quips, but only received $4 million because the issue was oversubscribed.
"I think the issues are great all around," said Mr. Ablin."They are better deal than many bank straight bonds or insurance surplus notes."
Mr. Ablin pointed out that he was able to garner a more than 8% yield on the BankAmerica Quips, which is far better than the 7.24% he would have gotten if he had purchased a straight BankAmerica bond.
Others noted the bargain, too. The next day after the BankAmerica deal came to market the spread had narrowed to 160 basis points over 30-year Treasuries from 178 basis points.
Mr. Ablin said he expects to buy more as the market becomes flooded with Quips this week.