Notes Issues by Bank Units Shave Costs
Seeking to increase flexibility and reduced the cost of capital, banking companies are turning to their lead banks to issue medium-term notes.
"You may see more of this kind of issuance from the bank, not the holding company," said a treasurer at a money-center bank. "It tends to be cheaper, and you need the capital at the bank."
Bankers Trust New York Corp. is putting the final touches on a plan that will allow it to issue debt through its lead bank and, separately, through the holding company, according to investment bankers. If it follows through, Bankers Trust would be the first money-center company to issue medium-term notes through a lead bank.
Meeting Different Needs
Bankers Trust is considering making this departure because it has the option of raising capital where capital is needed, market experts said. In some months, the holdoing company may want to sell medium-term notes to shore up capital; at other times, the bank may need money to fund operations.
Money-center banks, the biggest issuers of medium-term notes, usually issue them through the holding company because it has the greater need for liquidity and capital. But investment bankers said debt issued at the bank level costs less. Typically, the savings is 10 to 50 basis points depending on the maturity of the notes and other factors.
Debt ratings provide the key to the savings. Banking units typically have ratings that are a notch higher than their holding companies'. As a result, they pay at least one-eighth of a percentage point less interest.
Bankers say this kind of deal may be too good to pass up.
Bank Quality Is Key
"There is growing interest in this, but you have to be a high-quality bank," said David Eddy, senior vice president at Northern Trust Corp. in Chicago. The company is considering starting a medium-term note plan through its bank. Mr. Eddy expects the approach to save at least 20 basis points.
In the past, some regionals have issued medium-term notes though banking units, specifically because of the debt rating differential.
Banks issued about $110 billion in medium-term notes in the first three quarters of 1991, nearly 20% more than last year. So far this year, Security Pacific Corp. has tapped this market for more capital than any other banking company, raising $3 billion. Wells Fargo & Co. raised almost as much - $2.6 billion, and Chase Manhattan Corp. was third, with just under $2 billion.
"The market has boomed for medium-term notes," said one investment banker.
Banks or banking companies can issue medium-term notes in small amounts, instead of the $100 million or more at one time in underwritten deals. Because underwriters are not involved, the sales are somewhat cheaper and quieter, according to bank treasurers.
Small Issues Possible
By issuing in small amounts, bankers have to attract just one investor at a time, rather than price an offering for a big market. Investment bankers say that in some medium-term note sales, banks have wound up paying a slightly lower spread to Treasury bills than an underwritten deal would have allowed.
PHOTO : Popular Capital Medium-term notes issued by banks, in billions of dollars