Preferreds see mild rally as week closes out; Capital One lists; DTE units recovering

By Stephanie N. Rotondo

Seattle, Dec. 2 – Preferred stocks were looking to rebound on Friday after getting clobbered for most of the week.

“The long bond is snapping back after getting beat down this week,” a trader said. He also noted that new unemployment data was “spot on.”

The latest report showed that U.S. unemployment dropped to 4.6%.

But the jobs number, combined with other economic data, indicates that “we will most likely see a rate increase later this month,” the trader commented.

The market started off rather strongly, with the Wells Fargo Hybrid and Preferred Securities index rising as much as 25 basis points. But the index briefly went negative in early afternoon trading, though it managed to end slightly positive, up 4 bps.

As was expected, Capital One Financial Corp.’s $500 million of 6% series H noncumulative perpetual preferred stock began trading on the New York Stock Exchange on Friday under the ticker symbol “COFPH.”

The issue ended the day at $24.49, which compared to the open of $24.37.

The preferreds were pegged at $24.26 bid, $24.44 offered in early dealings.

However, it was the existing series G securities (NYSE: COFPG) that were trading more actively, falling 12 cents to $21.46.

The new issue came Nov. 21, upsized from $200 million. Price talk was in the 6.125% area.

BofA Merrill Lynch, J.P. Morgan Securities LLC, UBS Securities LLC, Morgan Stanley & Co. LLC and Wells Fargo Securities LLC ran the books.

As for the current week’s deals, DTE Energy Co.’s new $280 million of 6% $25-par 2016 series F junior subordinated debentures due 2076 were rebounding a bit to $24.20 bid.

The paper had been closer to $24.00 on Thursday.

The deal priced Monday.

Looking ahead, a trader said he was hearing that at least three more new issues were planned for the month, all of them investment grade.

He did not yet have any specifics on those proposed deals.

GSE preferreds retreat

After two days of sizable gains – as much as 50% on Wednesday and 12% on Thursday – Fannie Mae and Freddie Mac preferreds were giving up ground.

Profit-taking could have been a culprit in the day’s declines.

Fannie’s 8.25% series T noncumulative preferreds (OTCBB: FNMAT) – which traded over 10.5 million times – slid 31 cents, or 3.43%, to $8.74, while the 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) dropped 20 cents, or 2.33%, to $8.40.

About 4.45 million of those preferreds were exchanged.

The variable rate series O noncumulative preferreds (OTCBB: FNMFN) weakened 27 cents, or 1.76%, to $15.05, on 1.77 million trades.

In Freddie paper, the 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) declined 18 cents, or 2.2%, to $8.02.

That issue traded about 3.26 million times.

The GSE-linked preferreds jumped as much as 50% in midweek trading after Steven 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.

In an editorial published late Thursday, The Wall Street Journal addressed just why any hopes of privatization are a long shot. It all goes back to a 1968 decision to give Fannie a congressional charter, allowing it to be a semi-private corporation that sells shares to the public. That decision came because prior to that date, the agency had been on the government’s books and was adding to federal spending during the Vietnam War.

Under the charter, Fannie was given enough links to the government that it appeared to have government backing. Freddie was given a similar charter in 1970.

Because of its implicit government backing, creditors were happy to dole out cash to the agencies at rates this close to the Treasury’s own rate.

The editorial goes on to say that therein lies the problem: Without any sort of government backstopping – or even the appearance of such – the agencies might not be able to access capital as easily as its competitors and could therefore struggle to profitability. However, if the government holds on to the firms, the GSEs’ debt could ultimately become a burden on taxpayers.

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