FDIC debt plan may spur $50 bln/month issuance-BofA
By Dena Aubin
NEW YORK, Nov 21 (Reuters) - Changes being mulled to an FDIC debt guarantee program for U.S. banks could smooth the way for several hundred billion dollars of top-rated bank debt issuance, Bank of America said in a new report.
The Federal Deposit Insurance Corp plans to finalize a rule on Friday that provides a guarantee to banks' new senior unsecured debt, potentially allowing the firms to issue debt with top "AAA" ratings.
The market could see roughly $50 billion in issuance per month until the deadline for debt issuance next June, Bank of America estimated in a report.
The so-called Temporary Liquidity Guarantee Program is expected to fill a financing gap for banks shut out of the corporate bond market by skyrocketing yields.
Bond issuance from the financial sector has come to a standstill since Lehman Brothers filed for bankruptcy on Sept. 15, triggering a sell-off in banks' and brokers' bonds.
More than $600 billion of dollar-denominated U.S. financial debt is set to mature through the end of 2009, Morgan Stanley has estimated. Without the guarantee program, banks may have been forced to pay some of the highest yields in decades to help refinance the debt.
Since late October, European banks have issued about $34 billion under similar guarantee programs, Bank of America said. That experience suggests U.S. guaranteed bank debt could be issued at around 25 basis points over the London interbank offered rate, the bank said. Three-month Libor was 2.16 percent on Friday.
In the corporate bond market, by contrast, JPMorgan's (JPM.N) three-year notes are yielding about 6.8 percent, according to MarketAxess. Citigroup's (C.N) three-year bonds are yielding 11.3 percent.
EASING SUPPLY PRESSURE
In a speech at a Johns Hopkins University event on Thursday, FDIC Chairman Sheila Bair said several changes will be made to the final rule for the guarantee program to provide greater certainty for investors.
In particular, Bair said the rule will include a mechanism for prompt payment and will allow tiered pricing, depending on the debt maturity.
The changes address two main sticking points that could have limited use of the program.
In its earlier form, investors would have had to work through a bankruptcy process to obtain their principal back if a bank got in trouble, Bank of America said.
Rating agency Standard & Poor's said earlier this month that it would not give the debt an "AAA" rating without a guarantee for timely payment.
The revised plan will also provide lower fees for short-term debt, making it more economical.
Those two changes could pave the way for widespread use of the program, effectively moving financial debt issuance maturing in three years or less to the agency market, Bank of America said.
"If they come to an agreement that banks and investors find palatable, I think it will be a positive for the markets," said Bob Bishop, portfolio manager at SCM Advisors in San Francisco.
"It will certainly take away supply pressure from some of the most frequent issuers, which are financial companies," he said.
The program will guarantee debt issued through June 30, 2009, with the guarantee lasting until June 30, 2012. The debt will be backed by the full faith and credit of the U.S. government.
Bank of America last month recommended that investors "overweight" high-grade financial bonds, citing the reduced supply of issuance in the corporate bond market and reduced credit risk. (Additional reporting by Walden Siew; Editing by Andrea Ricci) (dena.aubin@thomsonreuters.com; +1-646-223-6325; Reuters Messaging: dena.aubin.reuters.com@reuters.net))
