After the recent spike in interest rates, Society Corp. faced a thorny decision this week:
Should it go ahead with a 200 million offering of subordinated debt or wait in the hope that rates would fall?
The Cleveland-based company went ahead with the issue Tuesday after concluding that the market for bank debt would not rebound by yearend.
"We forecast a very difficult capital market with a lot of supply from the bank sector," said Eric Rasmussen, a senior vice president in the bank's treasury area. "We continue to believe that spreads [over U.S. Treasuries] on these types of securities are not going to get better in 1992."
Fears of Inflation
The Treasury market has been roiled by political uncertainty in recent weeks. The chief fear has been that a Clinton Administration would spark inflation by increasing government spending to spur faster economic growth.
"The key here is not that we are definitely at a low point for interest rates, but that there is a very real risk that rates could rise further with a Clinton presidency," said John Lonski, senior economist with Moody's Investors Service.
"The widespread perception now is that the market is going to waffle from now until year end," said Joseph Labriola, fixed income analyst with Kidder, Peabody. He said that while there was not a large overhang of potential new issues by banks, underwriters were still trying to sell significant amounts of bank bonds from their own inventories.
Bank debt issuers have faced sharply rising yields on benchmark Treasury securities since late last month, and have had to pay wider spreads over Treasuries.
Yields have shot up 25 basis points, to 6.71%, on 10-year Treasury securities since Sept. 24. Bank subordinated debt is typically priced at a yield spread over 10-year Treasuries.
The Keefe Bruyette & Woods Bank Bond Index of large-bank bonds has seen its yield spread over Treasuries widen to 119 basis points in the middle of October from 95 on Aug. 15.
Society wanted to add Tier 2 capital before yearend to bring its total capital ratio above 10%, and thereby qualify as "well-capitalized" under new rules, said Mr. Rasmussen, Well-capitalized banks will qualify for lower deposit insurance premiums.
Society Saves Points
Society National Bank, Society Corp.'s flagship, issued $200 million of 10-year subordinated notes, yielding 7.865%, at a yield spread of 110 basis points over 10-year Treasuries.
Society saved about 5 basis points by issuing at the bank level rather than through the holding company, said Mr. Rasmussen.
The savings are attributable to the bank's credit ratings of A3 by Standard & Poor's and A-minus by Moody's, one notch higher than the holding company's.
Society was eager to avoid having the price of its bonds fall in the secondary market, said Mr. Rasmussen. The bank's bond issue was fully sold Wednesday and was selling later that day at a slight premium to its issue price.
Overall Yield Down
The overall yield of Society's issue this week was lower than the 8.125% it paid on a $200 million issue of 10-year subordinated debt in late June. But the June issue was priced at a tighter spread of 89.5 basis points over Treasuries.
Separately, two banks have begun marketing $150 million issues of preferred stock. Banco Santander is readying an issue through underwriters led by Lehman Brothers, with price talk for the dividend at 8.50%-8.625%.
First Chicago is readying a $150 million issue through underwriters led by Merrill Lynch, with price talk at 8.375%.
The terms for two recent 10-year subordinated debt issues by Society Corp. 6/22/92 10/27/92(*)Amount $200 $200 million millionSpreadOver 89.5 110TreasuriesYield atissue 8.125% 7.865%(*) Issue by Society National BankSource: American Banker