Nonbanks Swamp Preferred Market
Now that other blue-chip companies are luring investors with preferred stock, banks face stiff competition and rising costs in a market they used to dominate.
Through the first three quarters of 1991, banks outpaced nonbank issuers of preferred stock, but lately that relationship has reversed. Since the fourth quarter began, nonbanks have issued 50% more preferred stock than banks.
By siphoning off limited demand for preferred stock, nonbanks are forcing banks with equivalent credit ratings to pay an additional premium, since banks are widely viewed now as riskier investment.
Banks |Not Seen as Safe'
"They are just not seen as safe anymore," said one capital markets specialist. "To the extent that you get a triple-B bank, the bank is going to have to pay up."
Banks like to issue preferred stock because the new shares bolster equity capital without diluting share earnings of common.
When interest rates are low, the cost of issuing preferred drops because the shares can carry lower dividends that are fixed for the life of the issue.
And even when interest rates are down, the dividends on the shares are well above those being offered on other retail investment products such as certificates of deposit, so yield-oriented investors will buy.
Ready to Go
Banks are clearly ready to seize this advantage.
"We are going to see a pretty good supply of bank preferred stock," said Robert Baer, a managing director at Merrill Lynch & Co.
Wells Fargo & Co. and First Interstate Bancorp both have issued preferred stock in the last few weeks. Banco Bilbao Vizcaya, a Spanish bank, is currently tapping the U.S. market with a $300 million preferred stock issue.
Mellon Bank Corp., Republic New York Corp., Chase Manhattan Corp., and BankAmerica Corp., among others, have shelf registration in place that would enable them to tap the market on short notice.
But several big companies have invaded banks' turf in the past few weeks, with clear results in the secondary market. Even as interest rates were coming down, the price of the preferred stock issued by the two California banks fell.
1st Interstate Shares Lose 6%
First Interstate's $200 million issue was priced at $25 a share last week but was trading Tuesday at $23.50, a 6% drop. An inverse relationship between price and yield means that when the price falls, the yield climbs.
Wells Fargo's $225 million deal fared slightly better; the stock has fallen 50 cents from the price when issued to $24.50 share.
Experts blamed the pricing pressure on two competing preferred stock issues: a $300 million deal by Sears, Roebuck & Co. and a $188 million issue by Morgan Stanley. Both hit the market along with the two bank offerings and diverted lots of retail buying interest.
Investor demand for fixed-rate preferred is limited. Although a growing number of institutions have been buying such securities, the bulk of the demand for fixed-rate preferred stock still comes from individuals - and their buying power is relatively small.
When a series of preferred stock issues come to market in rapid succession, investors quickly get picky and start demanding high dividends and top-quality names.
That's why the added presence of the industrial issuers is a problem for banks: with all the bad news surfacing about banks, individual investors are chary of bank securities when others are available.