Small banks are scrambling to issue trust-preferred securities in the next two weeks as a widely expected market-killer draws near.
Investment bankers and investors said that banks could issue anywhere from $1.5 billion to several billion dollars of trust-preferred securities in the next two weeks-an estimated 30% of which would be from issuers with assets of $5 billion or less.
Market experts said that time is running out. Legislation to disallow tax deductions on debt securities with more than 20-year maturities is expected to reemerge next month in President Clinton's budget.
The prevailing view on the Street is that budget proposals to end "corporate welfare" will wipe out the market, but investment bankers said they expect any issuance of trust-preferred securities before early February to be treated under current tax rules.
So the race is on. Last Tuesday, $1 billion-asset Irwin Financial Corp., Columbus, Ohio, issued $43.7 million of trust-preferred securities. Stifel, Nicolaus & Co., which led the Irwin deal, said it also is involved in an imminent trust-preferred deal for another banking company but declined to elaborate.
The $3.2 billion-asset Webster Financial Corp., Waterbury, Conn., and $5.5 billion-asset Onbancorp, Syracuse, as well as other banks and thrifts are expected to place trust-preferred securities privately.
Market experts noted that smaller banks and thrifts' credit ratings are often too low to attract institutional investors so that they must target retail investors.
In any event, placing the issues is unlikely to be the breeze that it was last year, some said.
"If the window of opportunity for the securities does close, there is going to be an emphasis on the higher-profile names and the public deals," said Jack Ablin, fixed income and senior fund manager of the private bank at Bank of Boston Corp. Issuing now "is also odd timing because we're awash in this paper."
The hybrid securities have created a flurry of activity because they are the least expensive way for banks to raise regulatory capital.
Star Banc Corp. continued the trend Wednesday, filing a $500 million shelf registration with the Securities and Exchange Commission, partly to issue.
NationsBank Corp. issued $500 million of floating-rate trust-preferred securities Tuesday.
Smaller issuers have trod much more cautiously, although several jumped into the fray in early December.
Analyst Thomas Stone of Duff & Phelps Credit Rating Co. said one fear about smaller issuers who are coming to market now is that their pricing may not be as attractive.
"There is only so much appetite for this paper, and I have to think that the market is slowing down," he said. "There have been so many big institutions such as J.P. Morgan's $750 (million); Wells has done a billion."
Mr. Stone noted that smaller issuers are likely to bring smaller deals, which carry a higher price.
"Citicorp will trade anywhere in the world," he said. "It is a lot tougher for some of the smaller deals because many of these issues are not always liquid."
However, others argued that the time is just right for small banks to issue trust-preferred securities.
"There are people that understand the story of these small banks," said bank bond analyst Eric Grubelich of Keefe, Bruyette & Woods Inc. "They understand that smaller bank get haircut by ratings. There are a lot of value buyers that like the risk versus reward of these deals and are willing to play."
Investor Peter Stimes of Flaherty & Crumrine Inc., who has bought trust- preferred securities, agreed.
"We require liquidity," he said, "but there is nothing magic about a big name. There are some places in the country where the Citicorp name is not the most accepted name."