Preferreds dip as Yellen speaks to Congress; NuStar’s deal fizzles; Fannie, Freddie gain

By Stephanie N. Rotondo

Seattle, Nov. 17 – Preferred stocks were only slightly off early Thursday but retreated more as the day wore on.

The Wells Fargo Hybrid and Preferred Securities index finished the day down 52 basis points. The index was off 5 bps at mid-morning.

The movement came as Federal Reserve chairman Janet Yellen told Congress that an interest rate increase was “appropriate relatively soon.” That leaves a rate increase on the table for December.

In her Thursday speech, Yellen also cited the dangers of waiting too long to act, which could result in the Fed having to move too quickly for the markets to handle.

The primary market was actually seeing some action, as NuStar Energy LP brought $200 million of 8.5% series A fixed-to-floating rate cumulative redeemable perpetual preferred units.

Price talk was 8.5%, according to a market source. The deal came upsized from $100 million.

Post-pricing, a market source pegged the units at $24.68 bid, $24.78 offered. He said that was “dramatically worse” than earlier quotes of $24.88 bid, $24.92 offered.

“That’s what happens when you double the size,” the source said.

A trader saw the issue at $24.90 bid in the early gray market.

“I’m kind of shocked that they are bringing a deal in this market,” the trader commented, especially as new housing and unemployment figures were “so strong.”

According to the reports out Thursday, housing starts surged 25.5% in October, while unemployment applications fell to a 43-year low last week.

The units begin to float at Libor plus 676.6 bps on Dec. 15, 2021. The higher-than-usual spread was “a function of the credit,” a source remarked.

“It’s not a popular sector right now,” the source noted.

The San Antonio-based master limited partnership plans to use proceeds for general partnership purposes, including the funding of future capital expenditures and to repay amounts outstanding under a revolving credit agreement.

GSEs remain in focus

In secondary trading, Fannie Mae and Freddie Mac preferreds remained strong. The securities have been on the rise since the U.S. election but began to wane on Tuesday, likely due to profit-taking. Come Wednesday, the preferreds popped again, with one market source noting a favorable Seeking Alpha article that might have helped the GSE-linked paper along.

However, he noted that the article contained “nothing new.”

In Thursday trading, Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) rose 28 cents, or 4.96%, to $5.93. The 7.625% series R noncumulative preferreds (OTCBB: FNMAJ) were up 13 cents, or 2.54%, at $5.25.

Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) gained 23 cents, or 4.28%, to close at $5.60.

The Seeking Alpha article noted that prominent players in the Fannie-Freddie saga are also connected to the incoming Trump administration. That includes major investors such as John Paulson – a member of Trump’s transition team – and Bruce Berkowitz, whose Fairholme Funds has brought one of many lawsuits against the government regarding its treatment of the GSEs.

The article goes on to say that given Trump’s inexperience as a politician, people such as Paulson and Berkowitz – who is not on the transition team but did donate to Trump’s campaign – could persuade the president-elect to take action that would be more favorable to investors.

The article did not, however, offer any insight as to Trump’s potential plans to deal with the mortgage agencies.

“Clearly, there is a lot of speculation out there,” a market source said. “At some point, things do have to get resolved.”

While the source noted that any change under the Obama administration was unlikely, he conceded that the new administration might also fail to act.

At the end of the day, though, one thing remained clear: “We do need a new mortgage finance plan in this country,” the source said.

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