M&T Matches Goldman with $750M Raise, Sets Trend

Key Takeaway

• M&T Bank Corporation matched Goldman Sachs' financing costs by raising $750 million at a 7.5% rate through preferred shares, 100 basis points lower than usual.
• The strategy attracted retail investors by issuing shares in $25 denominations, potentially setting a trend for regional banks to secure lower coupons.
• This innovative financing could allow for future refinancing at lower costs amidst speculation of Federal Reserve rate cuts, minimizing extension risk.

Innovative Financing Strategy

M&T Bank Corporation, a regional US lender with significant exposure to the commercial real estate sector, has successfully matched the financing cost of industry giant Goldman Sachs Group Inc. by leveraging a less commonly used market for bank capital. Opting for the issuance of preferred shares in retail investor-friendly denominations of $25, M&T Bank raised $750 million at a fixed-for-life rate of 7.5%. This rate was notably up to 100 basis points lower than what could have been expected in the larger, more commonly tapped market, where deals typically feature fixed-to-floating rates. The move not only demonstrates M&T Bank's strategic financing approach but also signals a potential shift in how regional banks might seek capital in the future.

Market Dynamics and Investor Appeal

The preferred shares market in the US is bifurcated into two main categories: smaller denominations traded on the New York Stock Exchange and larger denominations that change hands over-the-counter. M&T Bank's choice to issue shares in the smaller denomination not only provided them with a more favorable rate but also opened up the investment to a broader base of retail investors. This strategy, according to Arnold Kakuda of Bloomberg Intelligence, could encourage more regional banks to consider similar issuances if they can secure lower coupons. The structure of these preferred shares, offering a fixed coupon until redemption by the bank, presents an attractive proposition for investors, especially in a financial environment where yields are close to historical highs.

Refinancing Opportunities and Market Implications

The successful issuance by M&T Bank comes at a time when financial preferred yields are near historical peaks, and there is speculation about potential interest rate cuts by the Federal Reserve. This environment suggests that M&T Bank, and possibly other regional lenders following in its footsteps, could refinance their issues at a lower cost in the future, minimizing extension risk. James Benadum of Parametric Portfolio Associates highlighted the difference in value of the call option between retail and institutional preferreds, indicating a strategic advantage for issuers like M&T Bank that can navigate these market nuances effectively.

Street Views

• Arnold Kakuda, Bloomberg Intelligence (Neutral on M&T Bank):

  "If fixed for life can help issuers print with lower coupons, then regionals may be more inclined to use the format."

• James Benadum, Parametric Portfolio Associates (Neutral on preferred securities market):

  "Retail spreads are 100 basis points below institutional preferreds."

• Allie Quine, Cohen & Steers (Bullish on regional banks' opportunities in the $25 par market):

  "It would be fairly difficult for a larger bank to get any meaningful size done in the $25 par market. Regionals, depending on size, can certainly get more attractive yields."