Magazine article American Banker

Debt Markets Forcing Banks to Raise Yields

Magazine article American Banker

Debt Markets Forcing Banks to Raise Yields

Article excerpt

Autumn has brought a chill to the market for bank bonds.

A glut of recently issued bank debt along with worries about the dollar, banks' third-quarter earnings, and a feeble economic recovery have turned investors cold on bank bonds.

To sell their paper, banks are being forced to pay yields over Treasuries that are roughly 25 basis points more than required just three weeks ago.

27-Point Hit for BankAmerica

"Now, we are finding out how much investors want to be compensated for risk," said John Lonski, chief economist at Moody's Investors Service.

For example, BankAmerica Corp. issued $300 million in 10-year subordinated debt Tuesday at a yield equal to 116 basis points over comparable Treasury securities. Just three weeks before, the company, whose subordinated debt is rated A3 by Moody's, issued debt at an 89-basis-point spread - 27 basis points less than this week.

The wider spreads are not limited to BankAmerica.

Westpac Banking Corp., Sydney, Australia, paid investors a 150-basis-point premium over Treasuries to issue 10-year subordinated debt Sept. 22. The price talk had been 25 basis points less. Like BankAmerica's, Westpac's subordinated debt is rated A3.

Corporate bonds in general are not suffering the same fate.

The average spread for debt issued by an A-rated industrial company was 94 basis points in August, according to Moody's. Tuesday, the average spread had narrowed to 89 basis points.

Investment bankers said wider spreads for bank debt are here to stay.

"I don't see spreads coming in," said an investment banker who was part of the underwriting syndicate for BankAmerica. "Bank spreads have enjoyed a spectacular run. Now, they are returning to more normal levels."

The past few weeks have been tough on banks issuing bonds. Last week, a run-up in the yield on 10-year U. …

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