Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.wpost From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Rates, Takeovers Make Bank Bonds Worth a Look=BY JAMES E. LEBHERZ= Date: Sun, 1 Nov 92 09:14:31 EST Message-ID: <5.1992Nov1.091431@AmeriCast.com> Rates, Takeovers Make Bank Bonds Worth a Look=BY JAMES E. LEBHERZ= There has been a flood of subordinated debt from the commercial banking industry in 1992 to help the banks shore up their capital to meet new regulations that take effect in December. So far this year, $11.6 billion of this kind of debt has been issued, compared with $5.3 billion in all of 1991, according to Securities Data Co. This heavy financing, the fear of a flattening yield curve erod- ing bank profitability, and renewed worries that the recovery is not improving have widened rate spreads between bank bonds and Treasuries. Research analysts at CS First Boston Inc. think that this widening of spreads offers investors a good opportunity to participate in the accelerating trend of banking industry conso- lidation; it's also a good chance to upgrade your bond quality. Analysts believe that there will be a pronounced tiering between high-quality and low-quality banks, brought on especially by the financing needs of the BBB-rated banking companies. With the spreads wider, First Boston recommends that investors focus on the higher quality regional banking companies. Some of those are Banc One Corp., MBNA Corp., NBD Bancorp Inc., Norwest Corp., and Republic NY Corp. First Boston also compiled a list of likely bank takeover candi- dates, all of which have passed three important tests: Each has shown at least three quarters of improving credit quality through June 30, each has improved its capital structures through recent or announced capital issuance, and each can be acquired by many potential suitors under the current regulatory framework. Here is First Boston's list of takeover candidates, with their ratings, plus an outstanding issue, along with a recent spread in basis points over the 10-year Treasury: AmSouth Bancorp. (A3/A-), 9.375 percent due June 1, 1999 (+100 basis points); Crestar Financial Corp. (Ba1/BBB-), 8.25 percent due July 15, 2002 (+135 bp); Integra Financial Corp. (Baa3/BBB), 8.50 percent due May 15, 2002 (+125 bp); and Shawmut National Corp. (Ba3/BB-), a floating rate note maturing in February 1997. Four other bank companies that don't meet First Boston's cri- teria and would be considered more speculative in nature are First Security Corp. of Utah, Midlantic Corp. in New Jersey, Bar- nett Banks Inc. of Florida and First Interstate Bancorp. First Boston analysts believe that the credit ratings of the banks will be upgraded as they are acquired by stronger and better-rated banking companies. An upgrade will lead to instant price appreciation based on the degree of the upgrade. Potential suitors (and their subordinated debt ratings) for these companies could include Wachovia Corp. (A1/AA), BankAmerica Corp. (A3/A), Banc One Corp. (A2/A+), Norwest Corp. (A2/A), Corestates Financial Corp. (A2/A), PNC Financial Corp. (A3/A-) and NationsBank Corp. (Baa1/A-). So here are two choices: Buy higher-rated bank bonds now that spreads have widened, or go for greater performance through price appreciation resulting from a weaker bank being acquired by a stronger bank. It is worth noting that banks that are acquired frequently have had some kind of financial problem, but they have managed to turn their bad situation around and are on the mend. The shares of such banks reflect current levels of profitability and quite often are seen as cheap to a healthy suitor or to an investor who understands the situation.<02:06 11-01C9999----- Copyright 1992, The Washington Post. This story is from the Washington Post's Capitol Edition On-Line and is not to be ar- chived or redistributed. For more information, send-email to American Cybercasting Cor- poration (usa@AmeriCast.COM)