Four of the borrowers had priced their bonds by yesterday (Thursday) — Wells Fargo, SunTrust Banks, PNC Financial Services and gas and electricity company WPS Resources. All achieved substantial oversubscription and tight pricing.
The fifth issuer, Standard Chartered Bank, is due to price a $500m-$750m perpetual non-call 10 year non-step-up offering this morning (Friday). The deal will be the London-based emerging markets bank's debut in the Yankee tier one capital market.
It was the most US hybrid deals yet issued in any one week, and a nice payback for bankers who have overcome obstacles this year that included the National Association of Insurance Commissioners' attempt to reclassify hybrids as equity, and both Standard & Poor's and Moody's putting out proposals for rating methodology changes.
"It's been a fantastic week for hybrids," said one senior trader of the securities in New York. "All the deals this week have been received well and they have traded well. You couldn't ask for more."
The week's performance was all the more impressive as it followed a frenzied period of spread tightening in early November, to record tight spreads.
Some deals that were priced at the peak of the buying spree, like Lloyds TSB's $1bn perpetual non-call 10 year tier one, have since moved back to more realistic trading levels. Lloyds' deal, for instance, was trading in the 163bp region over Treasuries, from a launch spread of 157bp and initial guidance of 160bp-165bp.
"The hybrid market is in a really interesting spot this week," said the senior trader. "We are coming through a few dealer year-ends and also after tremendous spread performance a few weeks ago."
Spreads have continued to tighten in the past fortnight, but not as fast as in early November.
Wells Fargo was the first off the rank on Monday with a $750m 30 year scheduled maturity issue of basket 'D' tier one securities.
Led by Goldman Sachs and JP Morgan, the deal carried an 80 year final repayment date, the latest structural innovation, designed to get 'D' basket treatment from Moody's for 30 years rather than the usual 10.
The offering was seven times oversubscribed, prompting the leads to push the envelope on price and tighten the spread to 138bp over Treasuries from 140bp area guidance and initial whispers of 140bp-145bp.
Although several accounts dropped out when pricing went inside 140bp, Wells Fargo ended up with the lowest subordination premium yet seen on a hybrid, paying just 38bp more than on its senior debt.
That compared with the 156bp trading level and 46bp subordination premium on JP Morgan's outstanding 30 year scheduled maturity hybrids.
Although the Wells Fargo pricing was considered aggressive, the book was clearly strong enough to ensure buying support in the aftermarket. The deal tightened a few basis points on the break and then came back to trade solidly around its 138bp launch price.
Once Wells was wrapped up, the Wisconsin-based gas and electricity supplier, WPS Resources Corp, announced a $300m 60 year non-call 10 issue, led by JP Morgan (structuring agent) and Bank of America.
The offering attracted $1bn of demand and was priced on Tuesday at 160bp over Treasuries, offering a subordination premium to senior debt of about 60bp-65bp.
Like most utilities, WPS opted for a 'C' basket structure, because S&P does not give non-financial companies or utilities more than 50% equity treatment. With that in mind, utilities see no reason why they should go the extra mile on structure to get 75% equity 'D' basket treatment from Moody's.
On Wednesday Goldman Sachs, Citigroup and SunTrust brought out a $1bn 'D' basket 30 year scheduled maturity hybrid for SunTrust Banks, the Atlanta based bank that operates in the US southeast.
SunTrust also achieved very tight pricing, of 148bp over Treasuries, from talk of 150bp area. The deal tightened 2bp on the break and at 10bp outside Wells Fargo, it mimicked the trading difference between the two banks in the senior market.
Although SunTrust also used an 80 year final payment date to get the 30 year Moody's basket 'D' treatment, it included a 60 year initial final payment date, to placate tax counsel. After 60 years SunTrust has the option to extend the maturity twice, for 10 years at a time.
PNC Financial Services, the former Pittsburgh National Bank and Provident National Bank, priced a $500m 6.517% hybrid capital issue late on Wednesday, through PNC Preferred Funding Trust.
Bookrunner Goldman Sachs used the same structure it had for Washington Mutual in February, except that this time it did away with the continuous five year call that caused the WaMu deal to trade poorly. PNC instead incorporated the more market-friendly discrete call structure.
The PNC structure and WaMu's are the only ones so far that can be booked as tax-deductible tier one capital at the operating bank level.
The deal qualifies for 'C' basket equity treatment by Moody's. It is an asset-driven preferred security with all the characteristics of a non-cumulative perpetual preferred, where payments are funded by mortgage assets.
Like Yankee bank non-innovative tier one capital, the structure does not step up if not called, but instead will float at the Libor equivalent of the initial coupon.
It was priced at a spread of 205bp, the tight end of its 205bp-210bp guidance, and traded 1bp or 2bp tighter on the break.
Finally, today Standard Chartered intends to make its debut in the Yankee tier one capital market with a $500m-$750m perpetual non-call 10 year non-step-up offering, led by JP Morgan, Merrill Lynch and Standard Chartered.
Price guidance yesterday was 200bp area, an attractive level compared with comparables and one that is likely to be tightened inside 200bp by the time the bond is priced. Initial feedback appears to have helped build a book of $1.3bn.
The deal is rated Baa2/BBB+, and is naturally being compared with the blowout Aa3/A rated $1bn perpetual non-call 10 year non-step-up Yankee debut that Lloyds TSB launched in early November, in one of the hottest new issue weeks of the year.
Other non-innovative Yankee comparables include HBOS at 158bp over Treasuries, Bank of Ireland at 170bp and Mizuho at 189bp. Mizuho was being used as one of the pricing guides because it is similarly rated at Baa2/BBB.
Danielle Robinson
