Autumn has brought a chill to the market for bank bonds.
A glut of recently issued bank debt along with worries about the dollar, banks' third-quarter earnings, and a feeble economic recovery have turned investors cold on bank bonds.
To sell their paper, banks are being forced to pay yields over Treasuries that are roughly 25 basis points more than required just three weeks ago.
27-Point Hit for BankAmerica
"Now, we are finding out how much investors want to be compensated for risk," said John Lonski, chief economist at Moody's Investors Service.
For example, BankAmerica Corp. issued $300 million in 10-year subordinated debt Tuesday at a yield equal to 116 basis points over comparable Treasury securities. Just three weeks before, the company, whose subordinated debt is rated A3 by Moody's, issued debt at an 89-basis-point spread - 27 basis points less than this week.
The wider spreads are not limited to BankAmerica.
Westpac Banking Corp., Sydney, Australia, paid investors a 150-basis-point premium over Treasuries to issue 10-year subordinated debt Sept. 22. The price talk had been 25 basis points less. Like BankAmerica's, Westpac's subordinated debt is rated A3.
Corporate bonds in general are not suffering the same fate.
The average spread for debt issued by an A-rated industrial company was 94 basis points in August, according to Moody's. Tuesday, the average spread had narrowed to 89 basis points.
Investment bankers said wider spreads for bank debt are here to stay.
"I don't see spreads coming in," said an investment banker who was part of the underwriting syndicate for BankAmerica. "Bank spreads have enjoyed a spectacular run. Now, they are returning to more normal levels."
The past few weeks have been tough on banks issuing bonds. Last week, a run-up in the yield on 10-year U.S. Treasury notes - the the benchmark used to price most subordinated debt issues - increased the issuing cost for Boatmen's Bancshares Inc., St. Louis.
Comerica Bank Detroit, a unit of Comerica Inc., delayed pricing $150 million in subordinated debt because of unstable market conditions.
Banks Seen Stfll Issuing Debt
The higher premiums over Treasuries that investors are demanding, however, are not expected to keep banks out of the market. Investment bankers are forecasting "reasonably heavy" issuance during the next few months.
If BankAmerica believed it could sell bonds at tighter spreads to Treasuries in the next two months, it would have waited, said an investment banker. Banks sitting on the sidelines, waiting for a fourth-quarter reprieve, risk another rise in Treasury yields, which could further increase the cost of issuing debt.
Indeed, the low yields banks were able to offer this year on debt issues have helped caused the tougher times now. A flood of bond issues hit the market last summer, as banks took advantage of low Treasury yields and eager investors to boost capital.
Pessimism on Economy
The volume of bonds coming to market slowed slightly in September. Still, banks issued more than $1 billion in securities last month. A saturated market, observers say, demands a bigger premium to buy more debt.
Compounding the oversupply problem is widespread pessimism about the economic recovery and how that will affect banks.
"The economy is weak, and loan demand remains soft," said William King, a bond analyst at Merrill Lynch & Co. "There are questions as to whether the earnings momentum of the banks can be sustained."
A weak economic recovery imperils banks' ability to reduce bad loans. In particular, banks with sizable exposures to California real estate are suffering.