(Bloomberg) -- A regional US lender with $25 billion exposure to the risky commercial real estate sector has pulled off the same financing cost as Goldman Sachs Group Inc. by tapping a little-used market for bank capital.

Buffalo, New York-based M&T Bank Corporation issued preferred shares, which banks in the US use to raise capital beyond common equity. This market is roughly divided into two categories: one sold in retail investor-friendly pieces of $25 and another that comes in much larger chunks of $1,000, with the latter having dominated issuance in recent years.

Instead M&T Bank opted for the former, raising $750 million at a fixed-for-life rate of 7.5%. That was as much as 100 basis points lower than market talk for what it might have got in the bigger market, where deals usually have fixed-to-floating rates, according to Bloomberg Intelligence. And it was the same rate as Goldman Sachs recently achieved from a preferred sale to institutional buyers.

The deal looks set to draw other regional lenders into a corner of the market that has been ignored by banks for years as they focused on big investors to build capital after the financial crisis. Even after recovering from the aftershock of Silicon Valley Bank’s demise last year, regional banks have broadly stayed out of the preferred market in the US.

“If fixed for life can help issuers print with lower coupons, then regionals may be more inclined to use the format,” said Arnold Kakuda, senior financials credit analyst at Bloomberg Intelligence. There was talk of M&T Bank having to pay between 8% and 8.5% had it chosen the usual type of preferred deal, Kakuda said.

Preferreds with smaller denominations are traded on the New York Stock Exchange and often pay a fixed coupon that is unchanged until the bank decides to redeem it. Those with larger denominations change hands over-the-counter and pay an initial fixed rate until the first early redemption option, after which they switch to a floating rate, thereby resembling the Additional Tier 1 bonds used to raise capital by banks in many other countries.

With financial preferred yields still close to historical highs and traders pricing in interest-rate cuts by the Federal Reserve starting from this fall, it currently looks likely that M&T Bank will be able to refinance its issue at a cheaper cost in five years. This minimized the so-called extension risk and allowed the lender to get a cheaper rate. 

“Because of the differences in structure, the value of the call option is also different,” said James Benadum, a senior portfolio manager at Parametric Portfolio Associates, part of Morgan Stanley Investment Management. “Retail spreads are 100 basis points below institutional preferreds.” 

Read more: Wall Street Fires Up Deals for Preferred Shares With Fed on Hold

If the refinancing scenario doesn’t materialize, however, M&T Bank will be inclined to hold on to this issue well past its first call date, preventing investors from reinvesting at higher yields. Big buyers would typically want to avoid such situations, so they put their heft behind issues that follow the usual fixed-to-floating format.

“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,” said Allie Quine, a preferred securities portfolio specialist at Cohen & Steers.

A spokesperson at M&T pointed to the deal’s term sheet and declined to comment further.

Since the collapse of SVB and other small lenders in March 2023, the supply of new preferred equity has been dominated by large banks in the $1,000 market. It’s been almost two years since one of the Big Six — a group comprising Goldman Sachs, Morgan Stanley, JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp. and Citigroup Inc. — sold preferred stock with a fixed-for-life coupon, based on data compiled by Bloomberg.

Still, the $25 market is not exactly a backwater. Companies have tapped it to raise capital for decades and its size — using the capitalization of exchange-traded funds as a proxy — is still comparable to the US junk bond market. Just after M&T Bank this week, Southern California Edison Company sold fixed-for-life perpetual preferreds through a trust.

While fixed-to-floating structures are set to remain prevalent overall, for smaller deals regional banks now have options. Cincinatti, Ohio-based Fifth Third Bancorp and Providence, Rhode Island-based Citizens Financial Group Inc. may be the next to tap the market, according to Bloomberg Intelligence.

“We see refinancing opportunities for midcap regional banks. Deal sizes of under a billion dollars can meet the needs of both issuers and investors,” said Parametric’s Benadum.

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