Rising interest rates and record supply have made it more expensive for banks to issue preferred stock.

First Chicago Corp. and Spain's Banco Santander are marketing preferred issues this week, and both are likely to pay more than they originally planned, investment bankers said.

Santander raised the proposed dividend yield on its $150 million issue to between 8.75% and 9% from the original 8.50%-to-8.625% range announced last week by lead manager Lehman Brothers.

The bank may price its issue as early as Friday, one source said. It is issuing the stock through Puerto Rico-based Santander Overseas Bank.

Market Demands

Merrill Lynch & Co., lead underwriter for First Chicago's $150 million issue, began marketing the deal at a 8.375% dividend yield last week, but a number of capital markets sources said the dividend must be raised for the deal to go through.

"The price does need to be bumped up in order to get the deal done," said one investment banker. "This is not a reflection on First Chicago; it's a reflection on the market."

Calls to Merrill Lynch and Lehman Brothers officials were not returned.

A first Chicago spokeswoman declined to comment, and Santander officials could not be reached for comment.

Preferred stock has no stated maturity and carries a fixed dividend that is based on 30-year U.S. Treasury bond yields at the time of issuance.

The yield on the 30-year bond has risen 47 basis points since hitting its 1992 low of 7.22% in early September. Late Wednesday, the bond was quoted at a yield of 7.69%, up 12 basis points in the last five trading days.

Preferred stock has been popular with yield-hungry investors all year. But the spike in long-term interest rates has caused these issues to lose some of their allure.

Because preferred stock pays a fixed-rate dividend, rising interest rates cause capital losses for investors. This has put a damper on new deals, an investment banker said.

Record Issuance

Banks have sold a record $4.152 billion in nonconvertible preferred stock this year, according to Securities Data Co. Banks tapped the market to raise Tier 1 capital at historically low rates and to refinance higher-cost preferred issues.

More than $25 billion of convertible and nonconvertible preferred stock has been sold by all types of corporate borrowers this year, eclipsing the $19.8 billion sold in 1991 and more than double the volume of issues in the previous four years, according to Securities Data.

Additional supply may come from Bank of New York Co., which is said to be preparing to launch a $100 million issue of preferred stock geared to retail investors, with some market sources predicting an announcement of the deal as early as today. A Bank of New York spokesman declined to comment.

Market sources speculated that the issue would replace a $100 million issue of preferred that Bank of New York recently decided to redeem.

The bank is redeeming its fixed/adjustable-rate noncumulative preferred series A, which has 100,000 shares outstanding, and which will be redeemed at $1,000 a share on Dec. 1.

Separately, Shawmut National Corp. said it completed the sale of 5.75 million shares of perpetual preferred stock, raising $138.7 million. The offering was increased from five million shares.

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