The market for trust-preferred securities - the hottest type of bank debt for the past two months - could soon lose steam, Wall Street sources said.
Some investment bankers are worried that a deluge of issuance this week could oversaturate the market, driving up yields and resulting in deals that don't sell out.
Trust preferreds exploded onto the market after the Federal Reserve approved the use of security to raise Tier 1 capital in October. Banks issue them because the proceeds on the security are tax deductible, making them a cheap way to raise regulatory capital.
Investors have snapped them up because of generous yields.
So far, $15 billion of trust preferreds - which are marketed by various investment banks under such brand names as Quips, Toprs, and Trups - have been issued.
Chase Manhattan Corp., BankAmerica Corp., First Bank System, Wells Fargo & Co., and J.P. Morgan are among the big banks that have come to market with big public offerings.
The latest wave includes a number of midsize issuers, who are placing the securities privately. Bancorp Hawaii Inc. and U.S. Bancorp recently placed $100 million and $300 million, respectively, of trust- preferred securities.
On Wednesday, Zions Bancorp issued $200 million and First Security Corp. issued $100 million to $150 million in private placements. And Northern Trust Corp., First Tennessee National Corp., and Washington Mutual Inc. are expected to follow suit shortly.
Bank America also issued $450 million Wednesday.
Issuance has been so heavy that some are worried about oversupply. And some blame aggressive marketing of the securities.
"The market is falling apart," said one source. "Several Wall Street firms are attempting to convince issuing clients that the Treasury will close the tax loophole on Jan. 1, which has caused the onslaught of supply."
Legislation that probably will call into question the tax deductibility of certain securities - including trust preferreds - is likely to be reintroduced as part of President Clinton's budget in February.
Ratings analyst Thomas Stone of Duff & Phelps Credit Rating Co. said that the fear of upcoming legislation has created "an unnatural market" for trust securities.
"With so many trust preferreds coming at the same time, you have to wonder if an issuer might be better off offering regular preferred stock or waiting six months," said Mr. Stone. "Investors will start to get bloated, and banks will be forced to offer a higher dividend on the security."
Concern that the market for trust securities could become flooded prompted Citicorp, which had remained on the sidelines, to come to market on Tuesday.
Steven Greene, vice president of corporate finance at Citicorp, acknowledged that it wanted to "beat" other issuers since "spreads tend to widen by yearend."
The money-center's issue of $300 million was described by investors and market sources as a "deep" and "highly liquid" deal. Two-thirds of the deal was bought with cash, the sources said.
There are some signs, however, that other bank issues may not be received with the same enthusiasm.
One regional bank had to pull its issue, and a foreign bank with operations in the United States had difficulty selling its issue two weeks ago, according to trading floor gossip.
"Spreads continue to move around, and we will see a slight weakening," acknowledged Gregory Williams, head of capital markets at Deustche Morgan Grenfell, "but it will not weaken on fundamentals, but rather on traditional yearend pressures."
Analyst Eric Grubelich of Keefe Bruyette & Woods noted that spreads tend to widen when investors swap in and out of the securities, but he said banks will not be affected.
"This is still inexpensive equity capital, and to pay five extra basis points is really low on the priority list."
