Preferred stocks sputter as December kicks off; DTE, Capital One trade lower; GSE paper up

By Stephanie N. Rotondo

Seattle, Dec. 1 – The first trading day of December was not starting out well for preferred stocks.

A trader noted that “generally, the whole market is off a decent amount today.” He attributed the overall weakness to a sell-off in the bond market.

The Wells Fargo Hybrid and Preferred Securities index closed down 62 basis points. The index was down 71 bps at mid-morning.

Recent issues were particularly pressured by the negative tone. For instance, DTE Energy Co.’s new $280 million of 6% $25-par 2016 series F junior subordinated debentures due 2076 – a deal priced Monday – were trading all the way down to $24.05 bid, a trader said.

Capital One Financial Corp.’s $500 million of 6% series H noncumulative perpetual preferred stock was also on the low side, being quoted at $24.30 bid, $24.45 offered.

The issue ended at $24.37, a loss of 11 cents. Over 1 million of the preferreds changed hands.

That deal came Nov. 21 and is slated to hit the New York Stock Exchange on Friday, according to a market source. The ticker symbol will be “COFPH.” Its temporary ticker is “CFFFP.”

Despite the weaker levels, Fannie Mae and Freddie Mac paper continued to push higher in the wake of Steven Mnuchin’s remarks that the GSEs need to get out from under government control.

Mnuchin, the current top pick for the incoming administration’s Treasury Secretary, said in a Fox Business interview on Wednesday that reforming the GSEs was a top priority, resulting in sizable gains for the agencies’ preferreds.

Meanwhile, gains in domestic crude oil prices continued to help energy-linked preferreds, such as Vanguard Natural Resources LLC and Legacy Reserves LP. Oil got a huge surge on Wednesday on news that OPEC had inked a deal to cut production among its partners.

The commodity remained strong on Thursday, rising over 3% to near the $52-mark.

GSEs continue to climb

Fannie and Freddie preferreds continued to show strength on Thursday, following Wednesday’s hefty jump.

Among Fannie issues, the 8.25% series T noncumulative preferreds (OTCBB: FNMAT) were up 17 cents, or 1.91%, at $9.05. Nearly 13.6 million of the securities traded during the session.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were meantime up 38 cents, or 4.62%, at $8.60, on about 8.66 million traded.

Two of Fannie’s issues made the day’s top percentage gainers list. The 7.625% series R noncumulative preferreds (OTCBB: FNMAJ) added 86 cents, or 12.03%, to $8.01, with 2.1 million of the preferreds changing hands. The variable rate series O noncumulative preferreds (OTCBB: FNMFN) rose $1.32, or 9.43%, to $15.32, on 1.11 million shares traded.

In Freddie paper, the 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) were up 45 cents, or 5.49%, at $8.65 at mid-morning but closed unchanged at $8.20.

About 4.17 million of those preferreds were exchanged.

The GSE-linked preferreds jumped as much as 50% in midweek trading, after Mnuchin said in an interview with Fox Business that housing reform would happen “reasonably fast” with the incoming administration.

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 their 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.

Oil names stay strong

Vanguard Natural Resources and Legacy Reserves remained firm on Thursday, following in line with the recent gains in crude oil.

Vanguard’s 7.75% series C cumulative redeemable preferred units (Nasdaq: VNRCP) up 30 cents, or 9.16%, at $3.59, while the 7.625% series B cumulative redeemable preferred units (Nasdaq: VNRBP) added 20 cents, or 5.97%, to close at $3.55.

The 7.875% series A cumulative redeemable preferred units (Nasdaq: VNRAP) improved by 21 cents, or 6.02%, to $3.70.

Meanwhile, Legacy’s 8% series A fixed-to-floating rate cumulative redeemable perpetual preferred units (Nasdaq: LGCYP) increased 35 cents, or 4.64%, to $7.89.

On Wednesday, oil prices surged as much as 8% on the day after OPEC agreed to its first production cut since 2008.

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.

Wells Fargo withers

Away from energy and GSEs, Wells Fargo & Co.’s preferreds were on the active side and weaker in line with the market.

The 5.85% series Q fixed-to-floating rate noncumulative preferreds (NYSE: WFCPQ) waned 28 cents, or 1.12%, to $24.72, as the 5.5% series X class A noncumulative preferred stock (NYSE: WFCPX) declined 37 cents, or 1.59%, to $22.90.

The 6% series V class A noncumulative preferreds (NYSE: WFCPV) slid 17 cents to $24.67.

It was reported Thursday that the San Francisco-based bank changed its bylaws to separate the roles of chairman and chief executive officer – a move that has been tried by other big banks but defeated each time. Wells Fargo opted to make the change in the wake of its sales abuse scandal in September that resulted in a $185 million settlement.

The change won’t have much impact on the bank’s current structure, as separate parties have held the roles ever since John Stumpf resigned his post in October at the urging of lawmakers. Tim Sloan was promoted to the CEO position after Stumpf’s departure and Stephen Sanger was named non-executive chairman.

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