New Issues Losing Steam in Second Half
Don't expect new-issue volume to keep pace later this year with activity in the first six months.
"The second half is going to look very different from the first half unless we get a dramatic turnaround in [interest] rates," said one investment banker.
With rates stuck at current levels, new debt issues will be hard to sell, especially for interest rate-sensitive financial institutions. Investors look forward to improved results when rates are expected to fall. But once rates bottom out, banks' margins get narrower, and so does demand for bank securities.
Fewer New Players
Moreover, many banks that sought capital last year have already taken that step. As a result, investors will not see the same number of bank deals as in the first six months of 1991, when banks raised $6.6 billion in fresh capital.
Investors snapped up bonds worth $2.5 billion in the first half of the year. The monthly volume picked up in February and reached $1.2 million in May.
Meanwhile, common and preferred stock drew $4.1 billion, with $1.5 billion coming in May alone. Shares of preferred were offered in fixed-rate and convertible forms.
Wells Fargo's Role
But new-issue activity suffered an abrupt halt in late June after Wells Fargo & Co. announced an unexpectedly large addition to loan-loss reserves.
The news spurred investors in bank stocks and bonds to start worrying about similar surprises at other banks. The deterioration in investor confidence led banks to hold off on new issues.
Wells' announcement was followed by a normal seasonal hiatus in the new-issue market. Every quarter, banks and other corporations defer new securities issues until after their earnings have been released, to avoid the necessity of disclosing a lot of information about their quarterly results before these earnings have been disclosed to the public at large.
But even though Wells' announcement is a month old, and the major banks have released their earnings, the prospects for new issues remain dim.
New filings for debt and equity issues have been scarce, and two of the banks that completed such filings this year -- Manufacturers Hanover Corp. and NCNB Corp. -- are otherwise occupied.
"I don't think you're going to see the issuance you saw in the first half," said Catharine Brady, an analyst at Salomon Brothers Inc.
Some Medium-Term Exceptions
To be sure, banks are not completely out of the capital markets. Bank of New York Corp., for one, was said to be posting rates in the medium-term note market on Wednesday.
And Barnett Banks Inc. is still gearing up to issue common stock.
The bank based in Jacksonville, Fla., filed a registration for such an offering in May, but the Securities and Exchange Commission has been reviewing Barnett's documentation.
In addition, mergers will eventually spur some new-issue activity.
But for now, the new-issue calendar is definitely light.
"This kind of a market is a Type A's worst nightmare," said one capital markets specialist. NCNB Corp. and the new Chemical Banking Corp. will not be in the market for at least a few months. And at Barnett, despite the bank's expressed desire to boost capital by issuing securities, the watchword is caution.
"Our overall plan has not changed," said a spokesman. But "in terms of the timing, that's another matter. It's a question of what's the appropriate price" to issue stock. [Graph Omitted]