Investors have been snapping up great buys in the trust-preferred securities market by turning to lesser-known names in the banking industry.
Analysts said they have been recommending lower-rated banks, especially since the securities of large banks and money-centers have gotten pricier in the last week.
"The most attractive sector is the mid- and lower-rated names that still have wider spread relative to top-tier names and the intermediate sector," said bank bond analyst Thomas Flynn of Morgan Stanley Inc. "There is less value in the upper-tier names."
Mr. Flynn and others argued that investors could pick up 30 to 35 basis points by investing in some of the medium to smaller bank holding companies.
Traders said that the yield differential between big banks and their smaller counterparts is significant. Banks such as Crestar Financial Corp., Zions Bancorp, and First Security Corp. currently trade at 125 to 130 basis points higher than comparable Treasury securities. Issues by banks with better-known names, such as Citicorp, tend to trade at 100 to 110 basis points over Treasuries.
Morgan Stanley has "buy" recommendations on First Empire State, Buffalo; Crestar Financial, Richmond, Va.; and Zions Bancorp and First Security, both of Salt Lake City.
Bank bond analyst Eric Grubelich of Keefe Bruyette & Woods Inc. said that trust-preferred securities buyers "are looking at the regional banks from an angle of consolidation." "Regional banks are taking over better- rated institutions, and you could have a significant profit because (trust preferreds) are 30-year securities."
Keefe Bruyette has "buy" recommendations on KeyCorp, Fleet Financial Group Inc., and Bankers Trust New York Corp. The latter's securities also yield more because it is seen as a securities firm, said Mr. Grubelich. He is also recommending even smaller institutions such as Colonial Bancgroup, Montgomery, Ala.; Hubco Inc., Mahwah, N.J.; and People's Heritage Financial Group Inc., Portland, Maine.
Michael Buchanan, a trader at Carmel, Ind.-based Conseco Capital Management, which oversees $30 billion of bonds, agrees that the tinier banks are attractive.
"The spread between the higher-rated domestic bank securities and the lesser-known banks are compelling on a relative basis," he said. "The pickup in spread will be worth it in many cases."
Some market observers caution that investors should be wary about investing in some of the lower-rated banks.
"If people want to travel way down the credit curve, then good luck to them," sniffed one capital markets expert.
But many analysts said that kind of bearishness is unfounded in the trust-preferred securities market.
"That is a little doctrinaire," said bank bond analyst Allerton G. Smith of Donaldson, Lufkin & Jenrette. "They are ignoring that corporate spreads are continuing to tighten and that bank trust-preferred securities continue to offer good relative value. You have to play in the market as it exists."
Mr. Smith said he is telling his clients to "take moderate credit risk." His "buy" recommendations include Bank of Boston Corp., Barnett Banks Inc., Fleet, KeyCorp, and Capital One.
Bank bond analyst Van Hesser of Goldman, Sachs & Co. said that the bottom line is yield.
"From a fundamental standpoint we don't think there is a lot of upside in the larger names," he said.
Goldman Sachs has "buy" ratings on MBNA Corp., First Tennessee National Corp., and specialty finance company Providian Bancorp.
