Banks Draw Up Rescue Funding Plans As First Republic Bank Bonds Rise

On Thursday, First Republic Bank bonds issued by the company were rallying even as First Republic Bank shares fell sharply as investors digested a report about a possible rescue plan for the California-based bank, while its bonds rallied even as its stock price declined sharply.

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Its 4.375% coupon bonds due August 2046 remained at a 379 basis point premium over Treasurys, down from 451 basis points above the risk-free rate during the day.

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On a yield basis, that's approximately 7.6% yield on 65 cents on the dollar, which compares to an 8.3% yield on 60 cents on the dollar, illustrating that investors want to compensate themselves just a little less for taking on long-term risks associated with the First Republic than they did in the past. The majority of people are still of the opinion that distressed bonds are those priced below 70 cents on the dollar.

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JPMorgan Chase & Co., JPM, 2.19 % Citigroup, Inc., 2.14%, and others are discussing plans to shore up the First Republic, according to The Wall Street Journal, citing people familiar with the matter. The Wall Street Journal reported on Thursday, citing Citigroup, Inc., 2.14%, Bank of America, Inc. BAC, 2.40%, and Wells Fargo & Co. WFC, 1.79% as involved in the plans.

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It was not possible to obtain a comment from a First Republic spokesman.

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As of Thursday afternoon, the price of First Republic's stock fell by about 16 percent, well above its lowest level of the session, but still down 78% from a year ago, according to FactSet, an investment research firm.

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In the aftermath of the collapse of Silicon Valley Bank SIVB, and Signature Bank SBNY, which resulted in losses of -22.87% and -21.08% respectively, investors have begun to worry about a greater risk of pressures building up in the banking system at the time that the Federal Reserve has sharply increased interest rates as of late.

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According to Janet Yellen, director of the U.S. Treasury Department, on Thursday, an assurance was given to senators that the U.S. banking system remains solid and Americans should feel confident about their personal funds.

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As investors took notice of Credit Suisse's share price falling to about $2 on Wednesday, the Swiss bank triggered concerns as well. In addition to tapping its central bank for 50 billion francs ($54 billion), the Swiss bank announced an offer to purchase beaten-up debt Thursday, which sparked a rally in shares.

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It is set for a lower start, with the Dow Jones Industrial Average DJIA finding its way up by up to 0.6%; the S&P 500 index SPX finding its way up by 1.2%, while Nasdaq Composite Index COMP moves up by 1.8%, following a higher start on Thursday.