Sovereign Debt Is a Hot Item, with Yields of More Than 10%

Article excerpt

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. …