Ally profit widens, preferreds finish mixed; market eyes Morgan Stanley redemptions

By Stephanie N. Rotondo

Phoenix, April 28 – The preferred stock market was looking to improve in early Tuesday trading but as was the case in the previous session came back in to end marginally weaker.

The Wells Fargo Hybrid and Preferred Securities index dropped 4 basis points. The index was up 2 bps at mid-morning.

Aside from a couple notable names, overall liquidity remained muted as the Federal Reserve began a two-day policy meeting that could give clues as to when interest rates will increase.

“I think the idea is that they are going to hold [rates steady], but let’s see what kind of signals they give,” a trader said. The trader noted that as the market waited for said signals, liquidity was subdued.

He also remarked that the lack of liquidity could be tied to fresh jobs numbers that are expected next week.

Ally Financial Inc. released its first-quarter results before the market opened on Tuesday, posting a profit that more than doubled from year-ago figures.

The rise in income was attributed to a one-time gain of $400 million related to the company’s sale of its stake in a Chinese joint venture.

Early in the day, the company’s preferreds were weakening, but by the bell, paper was ending mixed.

Also topical for the day was Morgan Stanley & Co. Inc., which announced late Monday the redemption of certain trust preferred securities. One market source noted that the move was “bizarre,” given the bank’s previous statements.

“It completely contradicted what they have been saying for the last nine months,” the source said.

The source added that among the day’s top five most actively traded paying securities, Morgan Stanley appeared three times.

“I wouldn’t be surprised if we see more of that,” a trader said of the redemption. With several names having older trust preferreds outstanding that are now callable – for instance, the Countrywide Financial 7% capital securities (NYSE: CFCPB) – such actions should start to pick up, he said.

Meanwhile, investors continued to pressure Deutsche Bank AG’s preferreds. The preferreds began to weaken on Monday as the Frankfurt-based bank announced plans to restructure itself. The plans include cutting €200 billion in assets from its investment banking portfolio.

The 8.05% trust preferreds (NYSE: DKT) closed 6 cents lighter at $28.57, while the 7.6% trust preferreds (NYSE: DTK) dipped a dime to $28.16.

“Investors were perhaps confused by the bank’s lofty, but seemingly contradictory, goals,” wrote Gimme Credit LLC analyst Kathleen Shanley in a report published Tuesday morning. “Deutsche Bank wants to ‘remain global,’ but ‘become more geographically focused;’ it hopes to ‘remain universal,’ but ‘avoid trying to be all things to all people.’”

Ally mixed post-earnings

Ally Financial reported a much higher year-over-year profit for the first quarter on Tuesday, but its preferreds finished rather wishy-washy.

The 8.125% series 2 fixed-to-floating rate trust preferred securities (NYSE: ALLYPA) closed off a penny at $26.28, with more than 3 million shares changing hands. The securities were off 3 cents in early trades at $26.26.

The 8.5% series A fixed-to-floating rate perpetual preferreds (NYSE: ALLYPB), however, ended up 4 cents to $27.09, though on significantly less trading.

For the quarter, Ally reported net income of $576 million, or $1.06 per share. That compared to income of $227 million, or 33 cents per share, the year before.

On an adjusted basis, earnings per share was 52 cents. Analysts polled by Bloomberg had forecast earnings of 41 cents per share.

The improved bottom line was attributed to a one-time gain of $400 million associated with its $1 billion sale of its stake in SAIC-GMAC Automotive Finance Co. Ltd.

Morgan Stanley in focus

Morgan Stanley’s preferred stock structure saw more action than usual on Tuesday as investors reacted to the company’s announcement of a redemption late Monday.

After Monday’s closing bell, the New York-based financial institution said that it would redeem all outstanding 6.6% capital trust VI securities (NYSE: MSJ) and all of its 6.6% capital trust VII securities (NYSE: MSZ).

On the news, those issues dropped to around the redemption price.

The capital VI shares closed at $25.08, a loss of 58 cents, or 2.26%. The capital VII preferreds declined 62 cents, or 2.41%, to $25.10.

However, the company’s straight preferreds fared somewhat better. The 6.375% series I fixed-to-floating rate noncumulative preferreds (NYSE: MSPI) gained 7 cents to $26.21, while the 6.625% series G noncumulative preferreds (NYSE: MSPG) held steady at $26.13.

The capital VI preferreds will be redeemed on May 27 at par plus 11.9167 cents in unpaid and accrued dividends.

A total of $862.5 million preferreds will be redeemed.

In the capital VII paper, holders will receive par plus 12.375 cents on May 12.

About $1.1 billion of those securities will be taken in.

The redemption of both issues is being done concurrently with a call of the junior subordinated debentures that underlie the trust securities.

Though it is typical for securities trading at premium to come in once called, the call itself came as something of a shock to the market.

“It completely contradicted what they have been saying for the last nine months,” a market source said.

During a fixed-income call in August, Morgan Stanley’s management told investors that it considered the trust preferreds as “good long-term funding for tier 2,” the source said. Though that in and of itself was a head-scratcher, the market toiled on, assuming the securities would stay outstanding.

Then, about a week prior to the release of the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), it was “leaked” that the investment bank had originally submitted a plan that included the redemption of the TruPs – but that plan was soon yanked in favor of what was eventually approved.

The source noted that the company even confirmed that scenario during its earnings call on April 20.

“Then they turn around and put out two call notices,” the source said.

The back-and-forth of management in regards to how it would deal with the TruPs has now left some wondering if the company could be trusted to provide accurate information.

“I heard from someone else that they said they are done calling TruPs,” the source said. “But who can believe them?”

For investors who relied on the company’s word that the securities would remain outstanding, the news was not great.

“It’s bad if you bought those securities at a premium in the marketplace,” the source remarked.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.