Bank Offers 1,000-Year Bonds

NEW YORK -- Will Republic National Bank still be around in 2997?


It appears that bond investors are confident it will. Lehman Brothers said Tuesday it was offering $250 million in 1,000-year bonds for Safra Republic Holdings SA, a European subsidiary of the New York bank holding company. A Lehman official said the offering was going well, but was not yet sold out.


The bonds were sold with a coupon of 7.125 percent, and priced to yield about 92- to 94-hundredths of a percentage point more than 30-year Treasury bonds now yield, or about 7.21 percent.


If all goes well for bondholders, they will get that amount of interest each year for the next 1,000 years and then get their money back. Given that no currency in the world has yet endured for 1,000 years, it is not easy to estimate what a dollar will then be worth.


There is no guarantee that the bonds will stay outstanding for anything like as long as that. The bonds can be bought back by Republic at any time, Lehman said, but that call provision is a relatively harsh one, with Republic having to buy back the bonds at a price that would give the investors a yield of 25 basis points -- or hundredths of a percentage point -- more than the yield on the 30-year Treasury bond at the time of the call.


In essence, Republic sold a security that will be viewed by investors as similar to a preferred stock, which has no stated maturity date. And it is likely that banking regulators will view the bonds as equivalent to preferred stock when assessing the company's capital structure.


But Republic will be able to deduct the interest payments it makes from its taxable income, as it can deduct any interest payments. Dividend payments on preferred stock are not deductible.


U.S. President Bill Clinton's administration, worried about a number of 100-year bond issues by corporations, proposed last year that interest not be deductible on bonds with a final maturity of more than 40 years after issuance. But Congress rejected the proposal. Still, many lawyers believe the treasury would reject deductions by a U.S. company on bonds with a maturity of more than 100 years.


Republic, the U.S. company, has only a minority interest in the European subsidiary, which is based in Luxembourg. And it believes that under Luxembourg law the interest payments will be deductible.


The fact that the bonds did not sell out on the first day shows that investors needed some persuading, as they did a few years ago when 100-year bonds returned for the first time since the late 19th century.