Morgan Stanley says regional banks should consider moving up offerings to this year given volatility risk.
Regional and mid-cap banks are looking to raise capital, whether to refinance existing debt, buy back stock or support balance sheet growth, and the market is hot—at least for now, according to Morgan Stanley bankers presenting at a recent meeting of NeuGroup for Regional Bank Treasurers.
- But volatility in the aftermath of last week’s Fed meeting could prompt institutional investors to pull back.
- So banks considering issuance of subordinated debt or preferred stock in 2022 may want to move up offerings to this year, Morgan Stanley said.
Plummeting pricing. New issue levels for midcap banks’ subordinated debt have dropped 200 basis points or more since the initial Covid infection peak last May, despite the rise in US Treasury yields, Morgan Stanley bankers said.
- And the coupons on those banks’ 10-year, noncallable five-year sub debt offerings have fallen from the 4% range at the start of 2021 to below 3% in some cases.
- Similar dynamics have impacted bank preferred stock, where rates fell from 6% or 7% in the second and third quarters of 2020 to as low as 3% now.
- Still attractive compared to corporate bonds, however, those yields have resulted in positive inflows into ETFs investing in the securities in the past 29 of 30 weeks, enabling issuers to double the size of last year’s deals with the same structure and rating.
The changing tide. A gradual increase in Treasury yields should prolong the favorable bank-issuance market well into 2022, but Morgan Stanley points out that sudden volatility can change investor sentiment quickly.
- ETF flows can turn negative in periods when Treasury yields have jumped, noted Drew Ertman, co-head of debt capital markets for financial institutions at Morgan Stanley.
- That could happen following the Fed’s announcement last week that it will start tapering its bond purchases this month, thus moving forward interest-rate increases. Morgan Stanley strategists anticipate the yield on 10-year Treasury notes reaching 1.8% by year-end, a meaningful sell-off that, if gradual, should not close markets, Mr. Ertman said. But volatility is bound to pick up.
- “That’s why moving [offerings] forward into Q4 versus waiting until January, given today’s low coupons and very low dividends, may make sense for some of you,” he added.