In these acquisitive times, a bank needs to find a cost-efficient means of funding its ambitions. In the recent takeover squabble for Belgium's Générale de Banque, ABN Amro suggested that it would issue $1 billion worth of preferred stock in order to help fund its, ultimately unsuccessful, bid.
For European banks, issuing preferred or capital securities promises to be an increasingly popular strategy, not only to fund acquisitions but also to shore up regulatory capital. Because in the right light regulators see preferred securities as tier-one capital, and accountants see the dividends payable on the securities as tax-deductible. It's a classic hybrid: it can be dressed up as equity or as debt, and the borrower can change the costume to suit the occasion. As one US banker puts it: "It is cheap, non-dilutive, no-voting equity, that doesn't cost significantly more than debt."
Issuance of this type of security is spreading beyond its traditional home in the US. This year capital-starved Japanese banks have jumped on the bandwagon, with deals from Sumitomo, IBJ and Fuji.
The latest jurisdiction to approve preferred securities as tier-one capital is Italy, and with the wave of consolidation in the country's banking sector it could prove to be an active market.