Some Chase Manhattan Corp. bonds tightened yesterday on company plans to sell $750 million of common stock and quickly unload $2 billion of commercial real estate assets.
One trader said Chase's intermediate paper tightened anywhere from five to eight basis points on the news, which three rating agencies said may lead them to upgrade the company's debt.
Charles J. Orabutt Jr., a group vice president at Duff & Phelps Credit Rating Co., said Chase's "bulk sale" approach to its commercial real estate woes is one that at least four other banks have already taken.
"It seems that a lot of other banks have done this thing in an effort to reduce their commercial real estate exposure," Orabutt said, naming NationsBank Corp., Fleet Financial Corp. Inc., First Chicago Bank, and BankAmerica Corp. as other banks who have engaged in bulk sales recently.
While the bulk sale offers banks a means of getting rid of their unwanted commercial real estate assets quickly, "it doesn't come without costs," Orabutt said. Chase expects to get 50 cents on the dollar, or about $1 billion for its $2 billion of assets, he said.
The bank has to choose between taking a hit to value in a quick sale or holding onto the assets on the chance that the market for those assets improves.
"By selling it you eliminate that uncertainty," Orabutt said, adding that Chase probably thinks, "~Let's get it done with, we won't be at the mercy of the commercial real estate market and investors will be more comfortable with our balance sheet.'"
As for the equity offering, "it strengthens the balance sheet in that it increases the capital base of the company and allows them to take advantage of growth opportunities," Orabutt said.
In a release, Duff & Phelps said it has listed the ratings of Chase Manhattan Corp. and its principal banking subsidiaries, Chase Manhattan Bank NA and Chase Manhattan Bank USA, on Rating Watch Favorable.
"These and other actions taken by management will significantly strengthen balance sheet measures, including capital, loan loss reserves, and problem asset levels," Duff & Phelps said in a release concerning the bank's announcement. "Further, the accelerated asset disposition program and associated write-downs will substantially reduce the commercial real estate loan portfolio's negative impact on earnings."
Ratings affected include Chase Manhattan Corp.'s BBB senior debt rating. BBB-minus subordinated debt rating, BB-plus preferred stock rating, and Duff 2 commercial paper rating.
Bank level ratings include Chase Manhattan Bank NA's Duff 2 short-term deposit rating and BBB-plus long-term deposit rating, as well as Chase Manhattan Bank USA's Duff 1-minus short-term deposit rating and A-minus long-term deposit rating.
For its part, Fitch Investors Service Inc. said it found Chase's plan to sell additional common stock "of particular relevance."
The rating agency said it is likely to give an A-minus rating to Chase's senior debt if the bank successfully completes the offering. Chase's subordinated debt is likely to be rated BBB-plus and its preferred stock is likely to reach BBB. The upgrades would be one notch from current levels.
"The decision to segregate approximately $2 billion in book value of commercial real estate is a significant change in Chase's workout philosophy for its troubled real estate portfolio," Fitch said. "This move is a right step for the corporation and melds well its strategic focus."
Standard & Poor's Corp. said it has listed Chase Manhattan Corp. and all its units on CreditWatch for a possible upgrade pending completion of the equity sale.
Candidates for upgrading include Chase Manhattan Corp.'s and Chase Manhattan Overseas Banking Corp.'s BBB-plus senior debt; Chase Manhattan Corp.'s BBB subordinated debt; and its BBB-minus preferred stock.
Standard & Poor's also may upgrade the A-minus/A-2 rating of both Chase Manhattan Bank NA, New York City's, and Chase Manhattan Bank USA, Wilmington's, certificates of deposit, bank notes and letter of credit-backed issues.
The agency affirms its A-2 commercial paper rating of Chase Manhattan Bank Corp. and Chase Manhattan Bank Corp. of Canada, which is not on CreditWatch. The Standard & Poor's action affects about $6.7 billion of rated debt.
"Chase Manhattan Corp.'s planned issuance of $750 million of common equity to build capital represents an acceleration of its capital strengthening program of recent years," a Standard & Poor's release says. "This new equity, together with gains on the sale of Brazilian bonds and an accounting adjustment, brings capital and reserves in line with other, higher rated money center banks."
Standard & Poor's said the move to dispose of $2 billion of risky real estate loans faster lowers the risk of carrying them for extended periods.
In secondary trading yesterday, trading was dead as one conference-shortened week moved right into another. Bear, Stearns & Co. held a high-yield conference last week and Merrill Lynch & Co. is sponsoring one that continues today.
Cable names were slightly better bid for and bonds of Southland Corp. were higher. But Stone Container Corp. bonds, though they did not show much change yesterday, have lost about 10 points since last week, when the Chicago paper and pulp company announced it was postponing an equity offering indefinitely because of market conditions. Overall junk ended flat to up 1/16 point.
High-grade spreads were unchanged to slightly wider as corporates followed Treasuries higher in what one trader called "listless" activity.
New Issues
News America Holdings issued $250 million of 8.875% debentures due 2023. The noncallable debentures were priced at 99.088 to yield 8.963% or 220 basis points over comparable Treasuries. Moody's rates the offering Ba2, while Standard & Poor's rates it BBB-minus. Merrill Lynch lead-managed the offering.
The Upjohn Co. issued $200 million of 5.875% notes due 2000. The noncallable notes were priced at 99.901 to yield 5.892% or 40 basis points over comparable Treasuries. Moody's rates the offering Aa3, while Standard & Poor's rates it AA. Morgan Stanley & Co. lead-managed the offering.
