Following robust earnings reports for the first quarter at NBD Bancorp and BankAmerica Corp., the banks have came to market with $350 million of bonds.
Strong first-quarter earnings, the expectation of a soft landing, and the relative dearth of corporate bond issuance have all made this a good time to issue new bank debt.
"Since April, when bank earnings were reported, there has been more than $2 billion of new issuance," said Ann Robinson, a fixed-income analyst at Bear, Stearns and Co. "It's a nice time for sellers. Everything is pretty euphoric in the view of the markets."
The market has focused on the positives, she said.
The two new bank bonds have structural elements that differentiate them from the typical long-term issue: 10-year subordinated noncallable debt.
In a Lehman Brothers-led deal, NBD brought $200 million of 12-year subordinated notes to market on Wednesday, with a coupon of 7.125% and a yield to maturity of 7.18%. The notes, rated A1 by Moody's, A-plus by Standard & Poor's, and AA-minus by Duff & Phelps, came to market priced at 65 basis points over comparable Treasuries. The price has since widened with the rest of the market to about 70 basis points over Treasuries.
"A 12-year issue is unusual in this day and age," said David Hendler, a fixed-income analyst at Smith Barney, noting that a 10-year term is the rule.
Nonetheless, analysts said the tenure is not unprecedented, and that in fact banks prefer longer-term issues because of the slower amortization schedule.
"From a capital point of view, it makes sense to extend out further," said Michael Leit, a fixed-income analyst at Prudential Securities Inc. A longer tenure gives a bank additional years of capital.
While the tenure didn't differentiate BankAmerica's deal, the debt classification for the Merrill Lynch-led deal did. The San Francisco-based bank issued $150 million of 10-year senior debt with a coupon of 7.125% and a yield to maturity of 7.261%. The bonds, rated A2 by Moody's, A by Standard & Poor's, and A by Duff & Phelps, were priced at 60 basis points over comparable Treasuries. Its price had widened out to about a 70-basis- point spread by the middle of the week.
While senior notes have a tighter spread and cost less for the issuer, analysts expressed some surprise that the bank would issue senior notes, which don't count in Tier 2 capital ratios.
"Banks get better funding costs at the senior level," said John Works, a fixed-income analyst at J.P. Morgan & Co. Since the spread between senior and subordinated paper remains tight, BankAmerica's senior issue comes as something of a surprise, he said.
Market sources close to the deal said BankAmerica, which has currently instituted a stock buyback program, is well capitalized and did not need the additional Tier 2 capital.
Analysts noted that spreads generally had widened a few basis points in the past week, but that they expected them to tighten soon.
