Securities issued by foreign banks are getting more and more attention- and money-from U.S. investors.
Step-up, fixed-rate, perpetual securities, which are issued by foreign banks and denominated in U.S. dollars, offer investors more yield, said analysts, who said the market is heating up as a result.
"We don't expect a frenzy like trust-preferred securities, but we do expect increasing supply," said bond analyst Charles Mounts of UBS Securities Inc.
As plain-vanilla bank paper grows less attractive, an increasing number of investors are looking for yield in new products, explained Mr. Mounts, who covers Yankee banks, or banks that issue securities in the U.S. market.
The hybrid Yankee securities, which evolved from the Euro step-up, perpetual floating-rate notes market, are issued by foreign banks to help shore up their upper Tier 2 capital-a requirement unique to foreign banks.
But in an attempt to broaden the investor base, capital markets experts devised a step-up version, which comes with a call feature so onerous that the security trades on the maturity of the call.
Royal Bank of Scotland issued the first such securities in March. Since then, $1.23 billion worth has been issued, said Mr. Mounts.
Capital markets experts expect up to $300 million of issuance in the next few weeks. Others expect up to $5 billion this year.
Analysts said U.S. Yankee bank investors have picked up nearly 50 basis points by investing in step-up, fixed-rate perps. The securities have gotten more expensive since then, but investors can still pick up as much as 20 to 25 basis points, said Mr. Mounts.
In other news, Citicorp Capital II, a unit of Citicorp, and First Chicago NBD Capital I, a unit of First Chicago NBD Corp., issued $700 million of trust-preferred securities Friday. Citicorp's $450 million issue was priced at 107 basis points over comparable Treasury securities, and First Chicago's $250 million global issue was priced at 64 basis points over the London interbank offered rate.
