Discover Financial's new deal frees up, rises sharply; CBL & Associates' preferreds end mixed

By Stephanie N. Rotondo

Phoenix, Oct. 10 - It was a "mostly green day" for preferred stocks Wednesday, though barely so, according to a market source.

Still, that was quite a feat considering the straight equity market was down almost 130 points on the day.

Discover Financial Services' new 6.5% series B noncumulative perpetual preferreds - a $500 million issue that priced Tuesday - was running up significantly in Wednesday trading, according to a trader.

The issue freed from the syndicate early in the session, the trader said.

Meanwhile, CBL & Associates Properties Inc.'s 7.375% series D cumulative redeemable preferreds were slipping even as the company's recent issue was gaining ground.

The series D preferreds were called on Friday. The company will use funds from its recent sale of 6.625% series E cumulative redeemable preferreds.

Discover's new deal 'on fire'

Discover Financial's new 6.5% series B noncumulative paper freed to trade early Wednesday, market sources reported.

The issue hit levels at par or above after pricing Tuesday and continued to pop in midweek trading.

At midday on Wednesday, a trader saw the paper trade at $25.50, leaving them at $25.45 bid.

"I'm not seeing a lot of offerings out there, just bids and then they get hit," he said. He added that he believes several funds were picking up the securities, speculating that the gains were due to managers covering shorts.

"They were on fire today," said another source after the bell. He quoted the issue at $25.48 bid, $25.55 offered.

As previously reported, the deal's higher coupon compared to other recent financial offerings was deemed attractive to investors looking for yield. Additionally, the fact that the name is well known, albeit new to the preferred arena, was also helping the new deal outperform its rivals.

The joint bookrunners are Bank of America Merrill Lynch, Citigroup Global Markets Inc., J.P. Morgan Securities LLC, UBS Securities LLC and Wells Fargo Securities LLC.

Proceeds will be used for general corporate purposes, which may include advances to subsidiaries to finance their activities, repayment of outstanding debt and repurchases and redemptions of issued and outstanding securities of Discover Financial Services and its subsidiaries.

Discover Financial is a Riverwoods, Ill.-based direct banking and payment services company.

CBL issues end mixed

CBL & Associates' 7.375% series D cumulative preferreds (NYSE: CBLPD) dropped 3 cents to $25.43.

On Friday, the Chattanooga, Tenn.-based real estate investment trust announced the redemption of the series Ds, which will be funded with proceeds from the Sept. 28 sale of 6.625% series E cumulative redeemable preferreds. The redemption will take place Nov. 5.

The recent deal listed on the New York Stock Exchange on Tuesday under the ticker symbol "CBLPE." The preferreds were trading at $25.33, up 13 cents.

BofA: Preferred prices peaking

Bank of America Corp. put out a research report at midweek noting that preferred stocks are reaching peak pricing levels. Though yields are at record lows, preferred paper still has a "respectable income advantage over Treasuries," the report said.

Furthermore, the report encourages investors who bought preferred securities for their price gains to sell given the belief that prices could soon face a decline, though not a substantial one.

"Although the potential upside for preferreds may be limited, we don't expect the market to decline meaningfully over the near term," the report said.

Preferreds are also not overvalued in relation to Treasuries, it said.

Broad market gains

Among the day's most actively traded issues, Royal Bank of Scotland Group plc took the top two spots of the day.

The bank's 5.9% noncumulative guaranteed trust preferreds (NYSE: RBSPE) closed flat at $17.80, while the 6.08% noncumulative guaranteed trust preferreds (NYSE: RBSPG) gained 9 cents, closing at $18.14.

Capital One Financial Corp.'s 6% series B noncumulative perpetual preferreds (NYSE: COFPP) were also on the list, rising 4 cents to $25.31.

In other financials, BB&T Corp.'s 5.625% series E noncumulative perpetual preferreds (NYSE: BBTPE) earned a penny, ending at $25.99.

And Kimco Realty Corp.'s 5.5% class J cumulative redeemable preferreds (NYSE: KIMPJ) finished 4 cents higher at $25.04.

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