Chase preferred stock sells well Buyers appear eager to own shares backed by mortgages

Banking

September 14, 1996|By BLOOMBERG BUSINESS NEWS

NEW YORK -- Chase Manhattan Corp. yesterday sold $500 million of a new product -- the first mortgage-backed preferred stock -- amid strong investor demand.

The success of Chase's sale bodes well for other banks, including Chevy Chase Bank, a Maryland-based savings bank. They're lining up to sell some $4 billion of the new preferred stock in the days ahead, investment bankers said.

Buyers were so eager to own Chase's preferred shares -- which are backed by mortgages on homes and businesses -- that they accepted a dividend 0.28 percentlower than where the shares were first marketed.

"We had broad-based interest from retail investors and also substantial institutional interest," said Chris Hogg, vice president Goldman, Sachs & Co., which invented the security and led a group of investment banks underwriting the sale. "Investors really like the product."

New York-based Chase, the nation's largest bank, sold 20 million shares of the preferred at $25 a share with a dividend yield of 8.10 percent, after initially offering them to investors with a dividend of as much as 8.375 percent.

The preferred stock provides the same advantages to retail, or small, investors as hybrid securities created by Wall Street firms such as Goldman and Merrill Lynch & Co. Companies have sold $17 billion of these hybrids, which combine features of debt and equity, in three years, according to Securities Data Co.

Chase's preferred stock pays fixed dividends, like the fixed interest payments on most corporate debt, but pays the dividends quarterly as do stocks instead of semiannually as do bonds. Priced at $25 a share, the preferred also is easier for small investors to buy than bonds, which usually come in $1,000 denominations.

Another reason the Chase sale was well received by investors was that not many banks have sold bonds and preferred stock lately, Goldman's Hogg said.

The new preferred stock is also a good deal for Chase because it will lower the bank's tax bill and boost its capital.

Chase will invest $500 million to establish a new real estate investment company, or REIT, called Chase Preferred Capital Corp. The REIT will sell the preferred and use the proceeds to buy residential and commercial mortgages from Chase's banking subsidiary.

Under current tax law, dividends on preferred stock sold by REITs, like interest on bonds but unlike dividends on preferred stock sold by corporations, are tax-deductible, which helps to lower Chase's financing cost.

The REIT preferred counts toward the minimum level of stockholders' equity, or Tier I capital.

Pub Date: 9/14/96

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