The Bloom Is Off Fixed-Rate Preferred
Prices have slumped lately on newly issued shares of fixed-rate preferred stock, indicating that investors are losing their appetite for this form of bank capital.
Investor demand has waned markedly following a three-month spate of these issues, which are also known as perpetual preferred because there is no maturity date.
"The perpetual preferred market is pretty dead. It's oversaturated," said one capital markets specialist. "There's only so much you can sell."
A KeyCorp issue priced June 21 was bid Monday at $24.50 per share, down from the offering price of $25. And an offering from First Chicago Corp. was bid at less than $24 per share, also down from a $25 offering price.
The weakness in the market is a setback for banks that had planned to raise capital through issuing the retail securities. Banks like to issue fixed-rate preferred stock because it adds to their Tier 1 capital but does not dilute the ownership of existing common shareholders.
A Flurry of Issues
Regional banks and money-centers have issued $1 billion in fixed-rate preferred stock this year. Chase Manhattan Corp., BankAmerica Corp., and First Chicago have all issued fixed-rate preferred stock this year. In June alone, Fleet/Norstar Financial Group, KeyCorp, and First Fidelity Bancorp. offered new shares.
But the market for the securities is mainly limited to wealthy people eager to lock in the high dividend rates. Institutions stay away from perpetual preferred stock; they prefer more liquid investments.
"Corporations want to buy stuff with less principal risk and more liquidity," said one capital markets specialist. "Perpetual preferreds are more of a stock-like investment" than a money market investment, he said.
The limited demand for preferred stock makes the timing of new issues tricky. Companies like to get in the market when no one else is planning a deal, so theirs will sell better.
But bankers tapping the preferred stock market in recent weeks have found a crowded field. June's issues by three banks followed offerings by investment banks and other financial concerns as well as several previous bank deals.
Wells Raises Worries
Moreover, credit-quality concerns are rising again among investors in bank securities. The announcement last week by Wells Fargo & Co. that it will add $350 million to its reserve for loan losses alarmed the market, leading investors to worry about the health of other banks. Those worries are making it even harder for banks to sell preferred stock - even though the most recent issues are being priced with dividends of 10% and more.
Still, market experts express confidence that the new supply will be absorbed and prices will rise again on preferred stock. Traders are getting ready to step up their buying in the market.
"From a trading point of view, I'd just as soon buy the market as sell it," said John McVeigh, product manager of preferred stock at First Boston Corp. "Some suppy is priced and gone, and dividends over 10% lure individual investors."