Fleet/Norstar Financial Group Inc. yesterday rounded out its acquisition financing for the fallen Bank of New England with a trip to the credit markets.
Leveraging new equity capital from recent common and preferred stock offerings, the Rhode Island-based bank raised Tier 2 money with $175 million of 10-year subordinated notes.
Fixed-income buyers loved the Fleet/BNE story, enabling underwriters at Merrill Lynch Capital Markets to increase the size of the deal by $25 million and still keep a single-digit coupon and thin spread, market players said.
Merrill Lynch priced the noncallable securities as 9.90s at par to yield 162 basis points over the Treasury curve -- rich compared with recent deals from comparably rated regional banks.
Florida-based Barnett Banks Inc., for example, offered $100 million of 10-year notes in late May priced as 9 3/8s for a 190 basis point spread, and those securities still moved slowly, traders said.
Moody's Investors Service rates Barnett's subordinated debt Baa2 and Standard & Poor's Corp. rates it BBB-plus, slightly above Fleet's Baa3/BBB standing. Moody's, however, is currently considering an upgrade for Fleet because of the BNE acquisition, which analysts expect will make Fleet/Norstar a major presence in Northeast banking.
"Given all the good publicity and the good reception the stock got, people are comfortable with this story," said William Downes, vice president at Keefe Bruyette & Woods Inc. in New York. "It's not surprising that they were able to get this done at a reasonably tight spread."
In February, before Fleet's successful bid for Bank of New England, the bank's outstanding intermediate-term issues traded at a risk premium of 525 basis points, though that spread had shrunk to 350 basis points by mid-March.
"Rating-wise, [Fleet] is somewhat behind other regionals, but for people looking for a solid regional credit this looks pretty good," Mr. Downes said.
James Quigley, head of the corporate syndicate desk at Merrill, said the offering's small risk premium "was a pretty aggressive spread for a deal that was increased. Even so, we were able to allocate it to 30-plus buyers.
"It's a very marketable story to fixed-income investors," he continued. "But Fleet does not have a lot of outstanding debt, so there's some scarcity value . . . The BNE deal really positions Fleet as a major banking force in the Northeast."
To finance the BNE deal, Fleet has issued common stock, perpetual preferred stock, and subordinated debt -- all within three months. The offerings were designed to build Fleet's capital base to the level needed to support the roughly $15 billion of assets it will acquire with BNE.
Many banks that have issued equity-type capital this year, such as top-tier Republic New York Corp., have also built their debt base to boost their ratios. Under commercial banks' new international risk-based capital guidelines, Tier 1 capital -- equity-type capital -- must represent at least 50% of a bank's total capitalization. But Tier 2 -- mostly subordinated debt -- can make up the other half.
Fleet/Norstar's offering highlighted a brisk Monday in the primary market, where syndicate desks priced nearly $800 million of new paper.
Among other issuers, Philip Morris Co., made its second trip to the debt market in less than a month, trimming its borrowing costs by more than 10 basis points.
Goldman, Sachs & Co. priced the $300 million offering of six-year notes as 8.75s to yield 69 basis points more than the interpolated five- and seven-year Treasuries.
Moody's rates the noncollable issue A2; Standard & Poor's Corp. rates it A.
Philip Morris Cos., the holding company for Philip Morris Inc., the world's largest consumer products company, paid 80 basis points more than Treasuries for the 10-year financing on May 29. Last November, the company issued seven-year paper with a 9 1/4% coupon to yield 105 points over Treasuries.
In the secondary market, most investment-grade and junk issues finished unchanged to 1/8 point lower.