The market for preferred stock is preparing for another wave of issuance by foreign banks.
Banco Espirito Santo e Commercial de Lisboa of Portugal is expected to file a registration for up to $100 million of preferred stock, and Banco Central Hispanoamericano of Madrid plans to issue $200 million of preferred, according to market sources.
The offerings are expected to be priced this month or next.
Exceeding U.S. Banks' Issues
If completed, the two "Yankee" issues would put the value of preferred stock issued by foreign banks this year at $2.4 billion, surpassing the $2.2 billion of preferred stock raised by U.S. banks.
Foreign banks such as Midland Bank in Britain and Credit Lyonnais of France are using preferred stock to rebuild capital after sustaining sizable credit losses in their home markets. Other foreign banks, such as Banco Santander of Spain, need the capital to support expansions in operations.
Many U.S. banks, by contrast, have plenty of capital already.
The Allure of MIPS
The 35 regional banks tracked by Morgan Stanley & Co. had an average Tier 1 capital ratio of 9.50% at Sept. 30, compared with 6.87% at the end of 1989 and 8.05% at the end of 1991.
But preferred-stock specialists said U.S. banks may be interested in issuing a new type of preferred stock security, called a monthly income preferred share, or MIPS, to refinance outstanding issues of preferred stock.
MIPS securities were recently issued by subsidiaries of Texaco Inc. and Enron Corp. through underwriters led by Goldman, Sachs & Co.
The MIPS pay a monthly dividend and are issued, by an offshore subsidiary incorporated under a law of the Turks and Caicos islands in the Caribbean.
The securities are structured to qualify as equity for the parent company, while essentially giving it a tax deduction for the dividend payments.
The tax-deductible aspect could reduce the cost of issuing preferred stock by up to one-third. Corporations generally have a 35% tax rate.
Here's how MIPS work. They are issued by a special-purposes corporation based where there is no corporate income tax. Proceeds of the issue are lent to the parent company in the form of a 50-year loan that may under certain circumstances be extended for 50 years.
The loan's interest rate is the same as the yield on the MIPS, and the parent's interest payments are tax-deductible. Payments on the loan and the MIPS can be suspended for up to 18 months.
Investment banks are working to adjust MIPS structure to pass muster as Tier 1 capital.
"It's got a lot of regulatory, hurdles to overcome," said a preferred-stock specialist. "I doubt you'll see a U.S. bank coming this year."
Obstacle for U.S. Banks
The offshore structure is the biggest hurdle for U.S. bank issuers. But some foreign banks do not have the same constraint. Spanish banks and Sakura Bank of Japan have issued preferred stock through offshore companies that essentially gave them tax deductions for the dividend payments.
A capital markets specialist said that international banking regulators meeting in Switzerland Dec. 7 will discuss offshore issuance and tax deductibility.The Preferred Market Upcoming SizeIssues in millions Banco CentralHispanoamericano $200Spain Banco Espirito 100SantoPortugal Recent issue NationalWestminster Bank $500(*)United Kingdom (*) Exchange capital security