National City Bonds Show Defaults KeyCorp Can't Deny (Update1)
By Caroline Salas
Aug. 19 (Bloomberg) -- Never have regional banks been so disrespected by bondholders.
National City Corp. Chief Executive Officer Peter Raskind says Ohio's biggest lender is the ``best capitalized of all major U.S. banks'' after raising $7 billion this year, yet its bonds show it's at risk of default. Cleveland-based National City's bonds have plummeted as much as 17 cents on the dollar since June and yield more than 10 percentage points above Treasuries, similar to Ford Motor Co. debt. KeyCorp, Comerica Inc. and Fifth Third Bancorp have also tumbled, falling as much as 14 cents.
The declines underscore growing speculation among investors that the more than $500 billion of credit losses and asset writedowns sparked by the collapse of the housing market are nowhere near ending, and there is little Federal Reserve Chairman Ben S. Bernanke or Treasury Secretary Henry Paulson can do.
``It's like catching a falling knife and I'm not real interested in that,'' said Eric Johnson, president of Carmel, Indiana-based 40/86 Advisors Inc., which manages $25 billion in fixed-income assets. Until yields on corporate credit and mortgages stabilize, ``it's still going to be too early to buy.''
More than a dozen regional banks have been closed by state or federal regulators since 2007. The number of lenders on the Federal Deposit Insurance Corp.'s ``problem'' list climbed to 90 in the first quarter from 76 in the fourth quarter, the agency said in May, without naming the firms.
Pimco Stays Away
Pacific Investment Management Co., manager of the world's biggest bond fund, is buying ``global national champions'' like New York-based Citigroup Inc. while avoiding regional banks, said Mark Kiesel, executive vice president. He doesn't find smaller institutions attractive even with the increase in yields because the government isn't necessarily willing to bail them out.
``I don't think every bank out there is too big to fail,'' Kiesel said in an interview from his Newport Beach, California, office. The global banks are ``more diversified, they have more stable deposit bases and larger capital bases. They're more stable and under the direct influence of the Fed.''
Kiesel, who oversees $180 billion in corporate bonds, said he's concerned the housing slump will spark losses on consumer loans, including credit-card and auto debt. Payments were late by at least 30 days on 4.03 percent of all credit-card debt in June, up from 2.92 percent in May 2007, according to the six largest U.S. credit-card lenders.
`Shoes to Drop'
``Everything's still negative to me when I look at the fundamentals of where housing prices are going to go,'' Kiesel said. ``There's still a lot of potential shoes to drop.'' He predicted housing prices will fall at least another 10 percent.
Investment-grade bank bonds yield 4.02 percentage points more than Treasuries on average, the most since at least 1996, according to Merrill Lynch & Co.'s index containing $514 billion of the debt. A year ago, the spread was 1.44 percentage points. The bonds trade at an average of 92 cents on the dollar, down from 98 cents at the end of 2007, the index shows.
Yield spreads widened even after the Fed cut its target rate for overnight loans between banks 3.25 percentage points the past 11 months to 2 percent as losses on subprime mortgages led to a downturn in housing and slowing economic growth.
In an effort to bolster confidence in the housing system, Paulson asked Congress on July 13 for emergency powers to inject ``unspecified'' amounts of government funds into Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac if necessary.
Even so, the Fed said Aug. 11 that its quarterly survey shows most ``domestic institutions reported having tightened their lending standards and terms,'' making funds scarcer for consumers and small businesses.
`The Market's Closed'
``I've been at National City for 30 years and a month and for 29 of those we've seen nothing like it,'' Thomas Richlovsky, National City's 57-year-old treasurer, said in a telephone interview. ``In past cycles certainly lending, or credit, has gotten more difficult. The cost of credit would go up. In this particular phenomenon of the last year it's not like you can borrow money and the price went up. No, the market's closed.''
National City on July 24 reported a $1.76 billion second- quarter loss and increased its 2008 forecast for uncollectible debt to as much as $2.9 billion. The Cleveland-based bank raised $7 billion of capital in April, which Richlovsky said is more than enough to weather the seizure in the credit markets.
The stock sale wasn't enough to stop National City's bonds from tumbling. Its $700 million of 6.875 percent notes due in 2019 traded last week at 61 cents on the dollar, down from 77.5 cents in June and 99 cents at the beginning of the year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
`Distressed' Bonds
The debt yields 14 percent, or 10.2 percentage points more than Treasuries, Trace data show. Bonds that trade at a spread of 10 percentage points or more are considered ``distressed.''
Such bonds default within one year 22 percent of the time, compared with 1 percent for non-distressed junk bonds, according to Martin Fridson, chief executive officer of New York-based research and investment firm Fridson Investment Advisors.
National City's bonds are rated A3 by Moody's Investors Service and A by Standard & Poor's, the seventh- and sixth- highest investment-grade rankings.
``The one thing that is distressed is the bond market itself,'' said Richlovsky. ``From a traditional corporate finance perspective this is an investment-grade company: The rating agencies say so and the balance sheet says so.''
`Needs to Shrink'
Kenneth Rogoff, a professor of economics at Harvard University and a former chief economist at the International Monetary Fund, said a large U.S. bank may fail within months.
``The worst is yet to come in the U.S.,'' Rogoff said in Singapore today. ``The financial sector needs to shrink. I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job. We're really going to see a consolidation even among the major investment banks.''
KeyCorp, Ohio's third-largest bank, reported a second- quarter loss of $1.13 billion on July 22, its first unprofitable quarter since 2001. The bank, also based in Cleveland, said loans it doesn't expect to be repaid climbed tenfold to $524 million.
KeyCorp's $750 million of 6.5 percent notes due in 2013 have fallen to 82 cents from 100 cents in May, according to Trace. The notes yield 11.6 percent, or 8.49 percentage points more than Treasuries, Trace data show.
The spread is about the average for bonds rated B, the middle speculative-grade tier. Those securities trade at a spread of 8.71 percentage points. KeyCorp's debt is rated A2 by Moody's and A- with a negative outlook at S&P.
KeyCorp spokesman William Murschel declined to comment.
``People are saying across the board that this is something that no one has ever seen before,'' said John Bartko, a banking analyst at S&P in New York. ``This market has deteriorated deeper and over a longer period of time than many people thought and as time goes on we're becoming increasingly concerned. We're simply not seeing really any indications of stability.''
To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net
Last Updated: August 19, 2008 09:12 EDT |
