Fannie Mae, Freddie Mac jump on Mnuchin remarks; energy preferreds up on OPEC agreement

By Stephanie N. Rotondo

Seattle, Nov. 30 – Preferred stocks were selling off in the final trading day of the month, though “not tremendously,” a trader said.

He called “everything down 15 cents to 30 cents on $25-pars,” which he added was about in line with where Treasuries were performing.

The Wells Fargo Hybrid and Preferred Securities index closed down 66 basis points.

“It was obviously a rough day in the market, unless you owned GSE preferreds,” a market source said.

Bucking the downward trend, Fannie Mae and Freddie Mac preferreds were “through the roof because of what Mnuchin said,” a trader remarked.

The trader was referring to Steven Mnuchin, the president-elect’s apparent pick for Treasury Secretary, who said that the GSEs should not be owned by the government.

“It was pretty clear,” the trader said of the comments.

The GSEs’ preferreds have been steadily climbing upward since the election of Donald Trump, on hopes that his administration would address GSE reform. Until Mnuchin’s comments, however, Trump’s campaign had not specifically addressed the matter.

In midweek trading, the Fannie and Freddie securities were up as much as 50%, making the preferreds the day’s biggest percentage gainers.

Also gaining ground were oil and gas-linked preferreds, as OPEC agreed to limit production for the first time since 2008.

Domestic crude prices traded up 8.27% on the day.

Mnuchin remarks help GSEs

Fannie and Freddie preferreds got a major boost on Wednesday as Mnuchin said that getting the GSEs out from under government control was a top priority.

“There was very little volume away from them,” one market source noted.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) rose $2.16, or 35.64%, to $8.22, on 7.76 million shares traded. The 8.25% series T noncumulative preferreds (OTCBB: FNMAT) improved $2.03, or 29.64%, to $8.88, with 6.19 million shares exchanged.

Fannie’s 7.625% series R noncumulative preferreds (OTCBB: FNMAJ) popped $1.77, or 32.9%, to $7.15, with 1.53 million preferreds changing hands, as the 6.75% series Q noncumulative preferreds (OTCBB: FNMAI) added $2.25, or 42.86%, to close at $7.50.

Nearly 577,500 shares of the latter issue traded.

In Freddie paper, the 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) gained $2.29, or 38.75%, to end at $8.20, with 8.8 million preferreds trading.

The 6.55% noncumulative preferreds (OTCBB: FMCKI) pushed up $2.15, or 47.78%, to $6.65, on 3.91 million shares trading.

In an interview with Fox Business on Wednesday, Mnuchin said that housing reform would happen “reasonably fast” with the incoming administration.

However, one New York-based desk analyst said the day’s sizable gains equated to “a pretty short-sighted reaction.

“All they talked about was a restructuring,” the source said. But, “there’s nothing about the word ‘restructuring’ that has to be a positive.”

Under the current terms of the GSEs’ 2008 bailout, which was further amended in 2012, Fannie and Freddie are under conservatorship and have to give nearly all of its quarterly profits to the Treasury. This has prohibited the companies from building up any capital cushion to use in the case of another financial crisis – something that has angered many of the agencies’ private investors.

While there have been several bills introduced to Congress, none of them have been successful. One thing they each had in common, however, was a winding down of the firms and not a recapitalization.

Even with the new administration, a source noted that House leadership will not change. That means Rep. Jeb Hensarling, head of the House Financial Services Committee, retains his position. And, having introduced his own bill that requires the agencies to essentially liquidate, it is unclear how the GSEs would be allowed to stay open for business.

“It can be argued that there is no functional need for Fannie and Freddie anymore, other than as a mortgage guarantor,” the source said. But there is not a lot of equity value in that.

Additionally, if Fannie and Freddie were to lose their government backing, “the cost to debt is dramatically higher,” the analyst said. That brings the firms’ future profitability into question.

Therefore, any hopes investors might have that reform would benefit them are being done on “a wing and a prayer.”

OPEC deal lifts energy

Despite doubts that plagued the market in the beginning of the week, OPEC has agreed to cut production for the first time in eight years.

The news resulted in oil prices jumping by 8.27%. That led energy-linked preferreds to higher ground as well.

Vanguard Natural Resources LLC’s 7.75% series C cumulative redeemable preferred units (Nasdaq: VNRCP) were 51 cents, or 18.55%, higher at $3.26, while the 7.625% series B cumulative redeemable preferred units (Nasdaq: VNRBP) added 39 cents, or 13.18%, to end at $3.35.

Those issues were among the day’s biggest percentage gainers, behind Fannie and Freddie.

Under the terms of the production cut, the cartel will reduce total production by 1.2 million barrels per day, beginning in January.

Nigeria and Libya were exempted from the agreement. Iran was allowed to increase its production to up to about 3.8 million barrels per day.

Saudi Arabia meanwhile took the biggest hit in the deal, having to curb output by about 486,000 barrels per day. Iraq will cut its output by 210,000 barrels per day.

Russia, a non-OPEC member, has also agreed to reduce its record-level production by as much as 300,000 barrels per day.

NuStar lists, DTE dips

NuStar Energy LP’s $200 million of 8.5% series A fixed-to-floating rate cumulative redeemable perpetual preferred units began trading on the New York Stock Exchange on Wednesday under the ticker symbol is “NSPA.”

The deal, which priced Nov. 17, was upsized from $150 million and priced in line with the 8.5% price talk.

There is a $30 million greenshoe.

The preferreds traded well upon listing, trading up to $25.27. That compared to $25.14 at the open.

Wells Fargo Securities LLC, BofA Merrill Lynch and UBS Securities LLC ran the books.

The distribution rate will be fixed until Dec. 15, 2021, at which point it will float at Libor plus 676.6 basis points. Distributions will be paid on a quarterly basis.

As for other recent deals, DTE Energy Co.’s new $280 million of 6% $25-par 2016 series F junior subordinated debentures due 2076 – a deal that priced Monday – took a hit.

One market source said the issue “technically” closed at par, though he noted that the volume weighted average price was at $24.625.

The source added that there was “a lot of volume” in the name, with 1.37 million of the debentures changing hands.

Earlier in the day, a trader said that $24.60 bids were “getting hit.”

That compared to a $24.70 to $24.75 context on Tuesday.

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