SunTrust Tenders $750 Million of Debt

SunTrust' share rose after the Southern regional bank said nearly $1 billion in debt.
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ATLANTA (

TheStreet

) -- The decision by

SunTrust Banks

(STI) - Get Report

to retire $750 million worth of debt will help the Southern bank lower funding costs and stabalize its balance sheet as it attempts to return to profitability.

SunTrust said Monday that while $947.5 million of notes were ultimately tendered, it had completed a buy back of only $750 million of notes - the figure it had originally agreed to purchase.

The $171 billion-asset bank initially announced the offering on July 26 and pricing details on August 9. Notes that were "validly tendered and not accepted" would be returned to investors as soon as possible, the bank said in a release on Monday.

The move removed some volatility from SunTrust's balance sheet and will help repay funds it accepted as part of the U.S.-government backed Troubled Asset Relief Program (TARP).

"There are two primary benefits for SunTrust - reducing our funding cost and reducing future income statement volatility," a SunTrust spokesman said in an e-mailed statement on Monday.

"The notes we've offered to purchase are marked-to-market through earnings under fair value accounting and have created material gains and losses to the income statement in prior quarters," the spokesman said in the statement. "Purchased notes will be retired thereby reducing future earnings volatility."

The deal was also likely a part of the new reality that many banks, not just SunTrust, are facing as deposits continue to flow but loan growth remains at nominal levels , said Kevin Fitzsimmons, an analyst with Sandler O'Neill & Partners.

SunTrust is "just trying to be opportunistic and to basically optimize their funding base," says Fitzsimmons. "So if you're getting quite a bit of low-cost deposits coming in, they can look at limiting some of their higher cost debt relative to deposits."

Other banks including

Citigroup (C) - Get Report

have also retired higher-cost debt.

SunTrust ended up repurchasing $244.9 million of 5.45% subordinated notes that matured in 2017, and $251.6 million of the $297 million of 5.00% subordinated notes tendered with a maturity date in 2015, according to a statement.

Additionally, SunTrust agreed to repurchase $142.3 million of the $168 million of 5.20% subordinated notes tendered maturing in 2017 and $111 million of the $131 million of 5.40% subordinated notes maturing in 2020.

Still, while SunTrust's liquidity position seems to be in a solid place, the regional bank that has yet to repay the $4.85 billion it took in TARP-related bailout funds in late 2008 despite solid capital levels.

Mark Chancy, SunTrust's CFO, said in a July quarterly earnings call that the regional bank was "well positioned" to repay taxpayer funds "at the appropriate time."

Analysts say that regulators will likely require SunTrust to raise additional capital in order to repay taxpayer funds.

SunTrust is "not alone," Fitzsimmons says. "Several companies of this category still are not profitable and dealing elevated credit losses."

Even with the positive momentum made on the credit front in recent quarters, "I think the general mindset of investors is that if one of these large regional

banks that appears to have good capital but is still unprofitable did

seek approval for TARP repayment, they would probably be forced to go through a pretty punitive capital raising exercise."

Fitzsimmons continued: "For a company like SunTrust, time is their friend. The longer you can wait to repay it, the closer you are at profitability and the potentially less punitive capital raise."

SunTrust's stock was rising 31 cents, or 1.3%, to $24.31 on Monday on trading volume of roughly 2 million shares. SunTrust's three-month average daily trading volume is around 7 million shares.

SunTrust's stock is up 18% year-to-date, based on Friday's closing price, but down 2.4% since July 22 in which is reported a second-quarter loss of $56 million, or 11 cents a share. Excluding the preferred dividends SunTrust paid on the preferred stock owned by the government, the bank would have made a profit of $12 million, it said.

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.