Debt Offerings Arise from Spring Nap

After a spate of new common-stock and convertible-preferred offerings in April and May, banks are shifting their attention to the debt markets.

Already this month, Republic New York Corp. and a subsidiary of J.P. Morgan & Co. have issued debt, and capital markets specialists say more deals are in the offing.

The change in focus underscores just how successful banks have been in raising new equity capital. It also suggests that bankers are growing worried that interest rates will soon rise, so they are trying to get to market before that happens.

"I think you're going to see a lot more activity in June than you did in May," said one capital-markets specialist.

A Thaw Since January

Just one bank issued debt in January, but seven issued senior or subordinated debt in February and 12 came to market in March.

Issuers found they were able to issue debt at lower and lower rates relative to Treasuries.

Bank stocks were rallying along with bank bonds, though, and by the end of the first quarter banks were responding.

At the end of March, the American Banker stock index was up 24% over its yearend close; in April it rose an additional 7.85%. Bankers responded, coming to market with four issues of common and convertible-preferred stock in April and nine in May, according to Securities Data Co.

But now things are changing again. Many banks that have now raised equity want to maximize its usefulness as regulatory capital. They want to build up their debt base to boost their total capital ratios.

Under the new risk-based guidelines, Tier 1 capital -- primarily common equity and securities convertible into common equity -- must represent at least half of a bank's capital. But Tier 2 capital -- mostly subordinated debt -- can be the other half.

"We just raised some Tier 1 capital with a convertible preferred issue, and part of leveraging that is raising Tier 2 capital," said Thomas Robards, Republic New York's executive vice president and treasurer.

Banks are also considering debt issues because they are worried about the direction of interest rates. Interest rates are at or near their bottom, experts say. So banks considering debt issues are eager to complete them before the cost of new debt rises.

Already, investors are showing some resistance to debt issues with very low yields. Recent offerings by Republic New York, BankAmerica Corp., and Barnett Banks Inc. are all said to have sold slowly.

And some banks are returning to the debt markets because they have raised as much equity as they wanted and are now focused on long-term funding. NCNB Corp., Mellon Bank Corp. and Fleet/Norstar Financial Group have all issued common equity. Barnett, BankAmerica, National City Corp., and others have issued convertible-preferred stock. [Graph Omitted]

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.