Magazine article American Banker

Investors Warm to Union Bank's Preferred

Magazine article American Banker

Investors Warm to Union Bank's Preferred

Article excerpt

After getting the cold shoulder from investors at several recent auctions, Union Bank of California met stronger demand Monday for its auction-rate preferred stock.

Investors, who had worried about the shares' liquidity, were apparently cheered by the San Francisco bank's announcement last week that it may redeem its two outstanding issues, totaling $150 million.

Dividends on the shares are reset every 49 days. The dividend rates have gone up substantially in recent auctions.

But at Monday's auction, the rate on a $60 million issue was set at 4.60%, equal to 116% of the interest rate on 60-day, AA-rated commercial paper, as published by the Federal Reserve.

In contrast, the dividend on $90 million of Union Bank auction-rate preferred was reset May 15 at 4.63%, or 120% of the same commercial paper rate.

If Rates Rise Sharply

The short maturity is aimed at giving investors liquidity. However, the issuer is allowed to postpone an auction if interest rates rise too sharply.

If Union's auction-rate preferred cannot be repriced with a dividend equaling a maximum 125% of the commercial paper rate, the auction is deemed to have failed, and investors must continue holding the stock.

Even the prospect of being stuck with the preferred stock because of a failed auction can cast a shadow over issuers, one market observer said. She said the price reached at the Union Bank auction May 15 came uncomfortably close to that point.

"No one wants the stigma of a failed auction on their name," said a capital markets official. …

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