Chase Manhattan Corp. said Wednesday it plans to issue $240 million of preferred shares, the latest step in a low-key program to rebuild capital.

The shares would add 25 basis points to the banking company's Tier 1 capital ratio, which stood at 6.1% at the end of the second quarter, according to Chase. At the end of 1990, that ratio was 4.32%, just over the minimum.

Reflecting the market's strong appetite for bank securities, the 9.6 million shares are likely to be priced at a lower dividend yield than the 8.5% on a $170 million Chase preferred issue offered in June, investment bankers said. Final terms will be set next week.

The bank may use proceeds of the new securities to retire an earlier offering of preferred with a higher interest rate.

"We've raised $1.5 billion in capital in the last 18 months," not counting the latest preferred issue, said Arjun K. Mathrani, Chase's treasurer. "And almost no one has noticed."

One reason for the lack of hubbub is that Chase has not tried to sell a big block of common shares.

Instead, the bank has raised total capital to 10.6% of assets at quarter's end, from 8.32% in 1990, through debt sales, preferred deals, and a highly successful shareholder option plan.

Another Offering Likely

The bank is likely to launch at least one more sizable issue of preferred before yearend to further strengthen capital.

"We plan to continue to work on our capital ratios," said Mr. Mathrani.

Preferred shares have been the cornerstone of Chase's capital rebuilding. After taxes, the dividend costs are less than on the common stock, an average of 8.5% versus 15%, said Mr. Mathrani.

And the yield spreads over Treasuries for Chase's preferred issues have narrowed by 200 basis points in the past year to 65 basis points.

Raising Equity

Chase has already come to market three times this year, raising $520 million in equity, some of which was used to redeem a previous preferred issue. Equity capital was raised by $132 million when Chase converted a debt issue to common stock earlier this year.

The bank has raised another $108 million in capital over the past 18 months by allowing shareholders to purchase stock at a 3% discount.

By sidestepping a brokerage house, both the bank and investors save on middleman fees. And the program enables Chase to take advantage of its rising stock price by issuing shares at higher prices.

"It beats going to the market," said Mr. Mathrani.

Problem with a Ratio

Chase also helped its capital ratios by trimming risk-adjusted assets, to $92.7 billion at the end of the second quarter from $101.6 billion in 1990. Mr. Mathrani does not expect another round of asset cuts.

Even with the new capital, one weak spot remains Chase's common equity ratio. It stands at 4.83%, subpar for a money-center bank. The goals is to reach 5% by yearend by retaining $170 million in earnings.

Some big investors want Chase to stop issuing common shares.

"Chase is at the point where it should let shareholders enjoy the benefits of the earnings recovery over the next few years and cut back on the reinvestment program," said Ronald I. Mandle, and analyst with Sanford C. Bernstein & Co., the bank's biggest shareholder with a 7.7% stake at yearend.

Nonetheless, Chase may raise more capital to finance a special-purpose corporation for derivatives trading, Mr. Mathrani said. The purpose would be to get a triple-A rating for the unit to make it more competitive.



Two foreign bank units issued a total of $250 million in subordinated debt in the United States on Wednesday.

A unit of Banco Espanol de Credito issued $150 million of 10-year subordinated notes. The 8 1/4% notes were priced to yield 8.32%, 142 basis points over 10-year U.S. Treasury notes. Banco Espanol, known as Banesto, is the first Spanish bank to issue subordinated debt in the United States.

In addition, Svenska Handelsbanken New York, a unit of the Swedish bank, issued $100 million of 15-year subordinated notes through Merrill Lynch & Co. The 8 1/8% notes were priced to yield 8.25%, 137 basis points over 10-year U.S. Treasury notes.

The issue is rated A1 by Moody's Investors Service and A-plus by Standard & Poor's Corp.

For the debt issued to by Banco Espanol unit to count as capital under Spanish law, interest would be deferred if the bank does not earn a annual profit. Interest would continue to accrue and would be compounded. Interest payments would resume once Banco Espanol, known as Banesto, posted a profit for a six-month period.

Capital markets officials estimated that the interest-deferral clause raised the bank's cost of borrowing by 15 to 30 basis points.

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