Bond investors have gobbled up Sovereign Bancorp's $700 million in debt because of highly attractive yields, analysts said Wednesday.
The bonds were issued Nov. 11 to finance Sovereign's purchase of 278 branches that are being spun off as a result of the merger between Fleet Financial Corp. and BankBoston Corp., which created FleetBoston Financial Corp.
Though questions persist about the wisdom of Sovereign's deal, the five- and seven-year notes, with yields of more than 10%, have been snapped up.
In the last two and a half weeks the spread between the price of the bonds and of comparable Treasury securities has narrowed by as much as 40 basis points, to about 400. That is still very high, though in the ballpark for other non-investment-grade debt.
During the same period, spreads on investment-grade commercial bank debt have tightened by only 3 or 4 basis points.
Bond holders were so eager to buy the Wyomissing, P.a., thrift's paper, that they sold their Golden State Bancorp bonds to buy Sovereign's debt, said bank bond analyst John Otis of Bear, Stearns & Co. Golden State, a $56 billion-asset thrift in San Francisco, also has non-investment-grade debt in the market.
When Sovereign's debt was issued "it blew out the spreads of Golden State," said Mr. Otis. "Investors were going for the higher yield."
Mr. Otis said that yields on Golden State four-year and three-year notes were about 9%.
The spreads on Golden State's notes widened by as much as 40 basis points in the last two and a half weeks. Bond holders who invest in Golden State are inclined to buy Sovereign's debt because the stories of the two companies are similar, said Mr. Otis. "They are highly double-leveraged thrifts, which are in good or affluent markets. In both cases investors are counting on an upgrade of the company's ratings or a takeover."
In addition to issuing senior debt, Sovereign issued $300 million in equity and $250 million in trust-preferred securities to help fund the deal. It also is borrowing $500 million from banks.
Sovereign's senior debt was underwritten by Salomon Smith Barney and Lehman Brothers.
But some market observers remain cautious about the deal despite the strong performance of the thrift's senior debt in recent weeks.
"I don't think people are wed to this name," said one bond trader who requested anonymity. "Just because some investors bought the debt does not mean they are fans of the deal."
Katherine Rossow, a bank bond analyst at Chase Securities Inc., also was cautious.
"This has been a good ride for investors," said Ms. Rossow "But I am still cautious on the Sovereign name. I am looking at the track record of the merger and a downward trend in leverage."
The double leverage at Sovereign's holding company has reached approximately 170% with this new transaction, making it one of the highest leveraged companies out of the top 50 bank and thrift holding companies in the United States, the analyst said.