To help fund its takeover of National Westminister Bank PLC in London, Royal Bank of Scotland Group PLC on Wednesday issued one of the largest capital preferred securities deals ever.

The issue was snapped up by U.S. bond investors who have been starved for debt and debt-like instruments.

Edinburgh-based Royal Bank of Scotland issued $2.25 billion of capital preferred securities in three tranches: $1 billion in U.S. dollars that is callable in 10 years, $500 million in U.S. dollars that is callable in five years, and $750 million in euros that is callable in five years.

Capital securities are tax-deductible, which lets banks raise regulatory capital cheaply.

Because the equity markets are sluggish, more and more financial institutions are turning to the preferred securities markets to finance their deals, said Van Hesser, a bond analyst at Goldman Sachs Group, which is helping to underwrite the deal.

Royal Bank of Scotland beat Bank of Scotland in a bidding war for National Westminster, a banking company that is almost twice its size in market capitalization. To complete the deal, the Edinburgh bank must issue a combination of cash, preferred stock, and common equity.

The use of this combination of capital securities is similar to recent capital-raising efforts of Sovereign Bancorp, a $25 billion-asset thrift based in Wyomissing, Pa., which used a combination of debt, common equity, and capital securities to finance its acquisition of 289 bank branches divested by FleetBoston Financial Corp.

Investors are growing more confident in the debt markets since the recent selloff in the equity markets globally, Mr. Hesser said.

Indeed, the Royal Bank issue was heavily oversubscribed, traders said. Within the first several hours of trading Wednesday, the yield on the $1 billion tranche tightened to 259 basis points over comparable Treasuries, from 270; the $500 million tranche's yield tightened to 205 basis points, from 222, and the $750 million tranche tightened to 164 basis points over a German benchmark security, from 170.

Investors found appeal in a liquid issue in a market that has been sluggish. Issuance of trust-preferred or capital securities by U.S. and foreign banks fell to just more than $30 million for the first two months of this year, from $500 million in the same period of 1999.

The one disadvantage of a bank's issuing Tier 1-qualifying preferred is that its capital ratios can suffer temporarily, Mr. Hesser said. Royal Bank's Tier 1 capital ratio is 5.9%. The minimum allowed is 4%, but the average for large global banks is 7.5%, the analyst said.

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