A rally in bank bonds spurred by U.S. Treasury Secretary Henry Paulson's rescue plan may ease the way for financial companies to refinance $89 billion of debt maturing through the end of the year.
Bonds of Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc. soared yesterday, reducing yields to an average of 6.46 percentage points more than Treasuries, after Paulson said the government would invest $250 billion in equity and guarantee new issues for three years. The so-called spread was a record 7.25 percentage points on Oct. 13, according to Merrill Lynch & Co. index data.
Debt markets have been shut to financial institutions amid concern that the collapse of Lehman Brothers Holdings Inc. and Washington Mutual Inc. and rising borrowing costs would lead to more failures. The U.S. guarantee should ease those worries, said Mark Kiesel, executive vice president at Pacific Investment Management Co., manager of the world's biggest bond fund.
``The banks right now effectively are under the government,'' said Kiesel, who oversees $180 billion in corporate bonds at Newport Beach, California-based Pimco, a unit of Munich- based Allianz SE. The U.S. ``is trying to help refinancing needs in the banking sector,'' he said.
No bank has sold more than $1 billion of senior unsecured debt since U.S. Bancorp of Minneapolis raised $1.36 billion in an offering of floating-rate notes on May 29, according to data compiled by Bloomberg.
Spreads Narrow
Yields on debt of New York-based Morgan Stanley rose to 11.3 percentage points more than Treasuries on Oct. 10, a level on par with distressed speculative-grade bonds, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. The spread narrowed to 4.88 percentage points yesterday. The gap on debt of Citigroup, also based in New York, reached 6.25 percentage points before shrinking to 3.96 percentage points yesterday.
Banks and finance companies have $89 billion of debt maturing this quarter, the most of any industry group, according to Fitch Ratings, and have $358 billion due in 2009.
They have sold $74.6 billion of bonds this year, down 54 percent from the same period in 2007, according to Bloomberg data. At the same time, the Standard & Poor's 500 Financials Index plummeted 41 percent and the average price of preferred stock tumbled to about 50 cents on the dollar as of Oct. 14 from 87 cents in December, limiting banks' ability to raise money. Preferred stock prices rose to an average 69 cents yesterday, Merrill Lynch index data show.
Lehman, Washington Mutual
The lack of financing options helped fuel the collapse of Lehman and Washington Mutual. New York-based Lehman, once the fourth-biggest securities firm, filed for bankruptcy protection on Sept. 15. Washington Mutual, the Seattle-based thrift, was taken over by regulators on Sept. 25.
Nine banks will receive $125 billion from the U.S. in exchange for preferred shares as part of the federal rescue plan. The Federal Deposit Insurance Corp. also said it will guarantee newly issued senior unsecured debt of banks, thrifts and certain holding companies for three years.
The FDIC will back new securities amounting to 125 percent of the debt banks have maturing through June 30. That would enable them to sell $12.5 billion of debt backed by the U.S. for every $10 billion they have coming due.
``This is quite a feature,'' said John Lonski, chief economist at Moody's Capital Markets Group in New York. ``It's one of the major features of the U.S. government's stabilization and it may go far at bringing in spreads for financial institution debt in general. The refinance risk has been assumed by the federal government.''
`Overweight'
Analysts at CreditSights Inc., a bond research firm in New York, upgraded their recommendation on the bank industry to ``overweight'' and boosted regional banks to ``market weight,'' according to a note to clients yesterday.
Investors may need more time before rushing to buy new debt, said Tim Cox, executive director in the capital markets division at Mizuho Securities USA Inc.
``I have spoken to a couple of treasurers on the bank side, and they're asking me, `Have we seen any increased demand or flow from this statement,''' Cox said. ``And it sounds like people are still trying to get their hands around it.''
While yield spreads narrowed yesterday, they are still 3.6 percentage points more than the 6 percent that bank bonds yielded on average a year ago.
Goldman, Citigroup
Goldman, the largest securities firm, has $6.4 billion of debt to roll over through year-end, Bloomberg data show. The government may buy $10 billion of preferred stock in New York- based Goldman as part of its rescue plan, according to people with knowledge of the situation.
The firm's 5.625 percent bonds due in 2017 rose 10 cents to 76 cents on the dollar to yield 10 percent yesterday, according to Trace. The yield spread on the notes narrowed to 5.95 percentage points, from 8.52 percentage points on Oct. 9. Spokesman Michael DuVally didn't return a call for comment.
Citigroup, the biggest U.S. bank by assets, has $12 billion of debt to refinance through year-end and $44.2 billion coming due next year, Bloomberg data show. The government may take $25 billion of preferred stock in New York-based Citigroup, according to the people, who declined to be identified.
Citigroup's 6.125 percent notes due in 2018 jumped 7.5 cents to 86.5 cents on the dollar to yield 8.2 percent.
`Off the Table'
``It takes the financial meltdown risk off the table,'' Christina Pretto, a Citigroup spokeswoman, said in a statement. She declined to comment on whether the bank may sell debt.
Morgan Stanley's 5.375 percent notes due in 2015 climbed 24.5 cents to 78 cents on the dollar and a yield of 9.8 percent. New York-based Morgan Stanley paid a spread of 2.88 percentage points to sell $2 billion of seven-year securities in May.
Morgan Stanley has $8.4 billion of debt maturing this year, according to Bloomberg data. The firm has no need to refinance, Colm Kelleher, Morgan Stanley's finance chief, said last month. The company can wait until 2009 to raise more in the markets, he said. Spokesman Mark Lake declined to comment yesterday.
``We have been pretty cautious on the financials pretty much across the board for the last 18 months or so,'' said Robert Gahagan, head of taxable fixed-income at American Century Investment Management in Mountain View, California. American Century manages $23 billion in fixed-income assets. ``This of course makes us feel much more positive on the sector. Going forward we'll be adding.''
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