It was in last year's third quarter that investment banks making markets in pooled trust-preferred securities pretty much shut off the spigot after investor demand dried up, leaving small banks with fewer options for raising capital.
But small banks determined to issue trust-preferreds have found one willing buyer out there: Wells Fargo & Co.
In the last seven months, the San Francisco banking company has bought up the trust-preferreds issued by about 15 community banks, according to Nick Williams, a managing director at Wells Fargo Securities, the company's investment banking subsidiary.
Mr. Williams would not disclose how much Wells has invested in the securities or from which banks it bought them, but he said that the company has a "strong appetite" to continuing investing in trust-preferreds.
"We are really working with banks that are in strong condition and well qualified," he said Monday. "We are interested in continuing to grow this portfolio."
Several industry watchers said that, though other investors have not completely stopped buying trust-preferreds, the $530 billion-asset Wells is believed to be the only newcomer to the trust-preferred market.
"The securitization market is clamped down tight," said Sanford "Sandy" Brown, the managing partner of the Dallas office of Bracewell & Giuliani LLP.
"I think the other guys that were active are still looking at deals," Mr. Brown said, "but the only deals we have done have been with Wells."
Added T. Alan Harris, principal of the Harris Law Firm PC in Houston: "I haven't heard of anyone that is doing it right now."
Wells was able to leap into the trust-preferred market while others were getting out or scaling back because it is well-capitalized and had already built the infrastructure it needed to operate in the business.
It had considered getting into the purchasing of these securities early in 2007 but, after setting up the infrastructure, held off because it considered the spreads too narrow.
This changed, quickly, however, after the subprime mortgage market became paralyzed and investors lost their appetite to buy the collateralized debt obligations that included pooled trust-preferred securities.
Even when issuers started offering the securities at higher rates, many investors were unable to buy them because they were tapped out. So Wells Fargo quickly pounced.
"We are well positioned to jump in and start buying new issues from well qualified banks while the poolers are on the sidelines," said Wells' Mr. Williams.
Banks from which Wells has bought the securities are issuing them on their own, rather than joining pools.
These banks are paying rates that in some cases are more than 200 basis points above where they were last summer and 100 basis points above the rate they would pay on holding company loans.
During the first quarter, issuers of trust-preferred securities could expect to pay about 350 basis points more than the London interbank offered rate, according to industry observers.
