The rush to issue trust-preferred securities is continuing, with smaller banks starting to jump into the fray.
Provident Bancorp, a $6.3 billion-asset Cincinnati bank, issued $100 million in preferred securities last week, and Republic New York Corp., a $43 billion-asset bank, issued $150 million.
Marshall & Isley Corp., a $13.3 billion-asset bank in Milwaukee, is said to have placed a private issue. And on Tuesday, Riggs National Corp., a $4.7 billion-asset banking company in Washington, was said to be privately placing an issue of trust preferred stock.
Close to $5 billion worth of issuance is expected this week, adding to the more than $10 billion issued by larger banks since October when the Federal Reserve approved the use of the securities - on which dividends are tax-exempt - to raise regulatory capital.
"We expect a significant amount of activity among (smaller institutions) based on the interest that we are seeing in the market currently," said fixed-income analyst Gregory Bauer of Moody's Investor Service.
The lower ratings smaller banks tend to receive are not a deterrent where these securities are concerned.
"The demand for these securities is across the credit spectrum," said Gregory Williams, director of capital markets at Deutsche Morgan Grenfell. "Regardless of the rating, investors see that these securities offer very attractive yields relative to their alternatives."
He noted that Provident's issue traded well, considering its rating compared to the best names such as J.P. Morgan.
Standard & Poor's rated Provident's issue BB and J.P. Morgan's AA-minus. J.P. Morgan's issue trades at 105 basis points over Treasuries, while Provident trades at 190 basis points, he said.
Many smaller banks, however, have remained on the sidelines because they do not have the same regulatory capital requirements as larger banks, said bank bond analyst Allerton G. Smith of Donaldson Lufkin & Jenrette.
Another deterrent is the higher cost, or "liquidity premium," that comes with issuing deals smaller than $100 million, he added.
Yet, Mr. Smith argues that smaller banks realize that trust preferred stock "still represent an extremely attractive form of Tier 1 capital," despite the additional cost.
Jack Ablin, fixed-income manager of BankBoston Corp.'s private bank, said he doesn't expect investor demand to subside any time soon.
"Any treasurer ought to be looking at these securities," said Mr. Ablin, who has dedicated 5% of his portfolio to trust securities.
"We want to stay at reasonable ratings, but we wouldn't rule out small banks," he said. "Yields are up 50 basis points beyond the normal bonds."