Though the market for trust-preferred securities remains strained, the warm reception for an offering from City National Corp. is expected to persuade others to consider this option for a capital boost.
Last week the Los Angeles company priced a $250 million public offering of trust-preferreds, a hybrid of debt and equity. City National said it might use the proceeds to help repay its $400 million of government capital.
The deal is notable because City National, with $18.4 billion of assets, is relatively small to be able to issue trust-preferreds in a public offering. Most public sales this year were done by the country's largest banking companies.
Industry observers said issuance could pick up now, though only the healthiest companies will be able to sell these securities and even they likely will have to pay up to attract investors.
"Usually when a number of banks are able to pull off a transaction like this successfully, others pay attention and analyze if it makes sense for them," said Ken Kohler, a partner at Morrison & Foerster LLP. "The influence of investment bankers who have done the deal once cannot be underestimated. To the extent the capital markets have a few successful offerings under its belt, it is obvious that investment bankers will be seeking new issuers."
This year only nine banking companies had issued trust-preferreds through Nov. 1, including four companies with under $20 billion of assets, according to data from SNL Financial LC. The smaller issuers generally had to use private placements.
Volume totaled $31 billion, with the vast majority of it — $27 billion — coming in two separate deals from Citigroup Inc. in the third quarter. The first quarter had zero issuance, and the second quarter had a paltry $73.7 million.
The $3 billion-asset Tompkins Financial Corp. christened the market this year, with a $15 million deal in April. Tompkins also did a second deal, for $3.55 million in May.
Smaller banks used to tap this market by pooling their issues together into collateralized debt obligations. But liquidity for CDOs dried up two years ago in the wake of the subprime meltdown.
This year, the risk associated with trust-preferreds has become apparent. Many of the banks that issued them began deferring payments; some of those banks failed. The securities were heavily downgraded by rating agencies, forcing banks that bought them to take writedowns.
Pooled issues remain moribund, but as City National demonstrated last week, single-bank offerings are again an option for healthier institutions.
"They got this done pretty easily, but I don't know how many banks the market is open for," said Edward Timmons, an analyst at Sterne Agee & Leach Inc. "You don't have the same amount of risk at City National as you do at other regionals. They have good fee income, decent reserve levels, and there are a lot of people out there that think this is a takeover target down the road because of the deposit base and footprint. That probably helped them get it done as easily as they got it done."
Jeff K. Davis, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets Corp., said City National's ability to attract investors bodes well for others.
"This is another green shoot," he said. "This is another good sign of healing in the markets. … The fact that a smaller regional bank could pull off a $250 million trust-preferred issue with a yield below 10% is good news for the industry."
Still, with so much uncertainty about banks, some observers were skeptical about the prospects for issuance. "A lot of investors that hold pooled trust-preferreds are suffering losses from banks that are going out of business," said Joe Gladue, an analyst at B. Riley & Co. "In the current environment, where there is a lot of suffering on similar instruments, there is less appetite for it."
Michael Iannaccone, president of Chicago's MDI Investments Inc., agreed. "I am surprised there are investors out there willing to buy," he said. "You have banks that go from well capitalized one quarter to undercapitalized the next after writedowns. With that threat out there, I am surprised there have been so many offerings."