Ethan Heisler, director of corporate bond research at Salomon Smith Barney, and an Institutional Investor ranked second-teamer, recommend investors seek value in the bonds of double-B and triple-B smaller, off-the-run regional banks such as Sovereign Bancorp (Baa3/BBB-), Dime Bancorp (Ba2/BB) and Riggs National (Ba2/B+). He says the bonds are the safest way to pick up decent yield in the investment-grade corporate sector while avoiding blow-up risk. While there are some indications of investor interest in this paper, many portfolio managers have their doubts.
Steve Schneider, director of taxable fixed income at Principal Capital in Des Moines, Ia., is one of several buysiders who says the names are still too illiquid. "Any kind of a flip in confidence, and what liquidity there is will disappear like that," he says.
Heisler cites the success of the $200 million First Massachusetts Bank 7 5/8% of '11 (BBB/BBB+) bond offering last week as an indication that investors are increasingly interested in lower-rated bank paper. He says the deal was 10 times oversubscribed. Jim Merli, managing director and head of fixed income syndication at Lehman Brothers, which underwrote the deal, says that the deal was oversubscribed, but would not say by how much.
Joe Marvan, unit head of the fixed-income group at State Street Global Advisors in Boston, is not convinced by the success of that deal. He says his firm watched the deal with interest initially when it looked like it would come cheap, but when the yield eventually fell to fair value, State Street backed off due to concerns about poor liquidity. As for the rate of oversubscription, Marvan says that on such a small deal, all of the interest could have come from a single buyer.