Activity in GSEs picks up as Senate, Watt look toward reform; Capitala notes free to trade

By Stephanie N. Rotondo

Seattle, May 11 – GSE-linked preferred stocks were back on center stage on Thursday, following a Wall Street Journal report that the Senate Banking Committee was kicking off a revamp effort.

Additionally, Mel Watt, head of the Federal Housing Finance Agency, addressed the committee on Thursday, stating that the mortgage agencies’ inability to retain its profits was not a sustainable practice and that Congress needed to act quickly on housing finance reform.

The news appeared to excite investors, and Fannie Mae and Freddie Mac preferreds were not only active in trading, but better too.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were up 57 cents, or 8.73%, at $7.10 on more than 2.1 million trades. The variable-rate series O noncumulative preferreds (OTCBB: FNMFN) were up 90 cents, or 8.11%, at $12.00.

About 2 million of those preferreds changed hands.

Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) were meantime up 56 cents, or 8.89%, at $6.84. Approximately 1.7 million of the preferreds were exchanged.

With Fannie and Freddie set to lose all of their current capital buffer in 2018, Watt expressed concerns about putting taxpayers back into harm’s way. Should either GSE have just one bad quarter, that would likely result in the agency drawing from the Treasury once again.

Those concerns are further flamed, he said, by the Trump Administration’s plan to cut corporate tax rates, which could have a negative impact on the GSEs.

Watt also noted that since being taken under conservatorship nearly 10 years ago, Fannie and Freddie have made many improvements – and urged Congress to consider those reforms when they take a stab at their own reform plan.

But whether or not Watt’s comments will be heeded are another story.

“It might make a difference in the short term, but not in the intermediate or long term,” a market source opined. “An intermediate resolution will be decided by a judge and longer-term there has to be a restructuring of the entire mortgage finance industry – and that will ultimately be decided by Congress and the president.

“It’s hard to say how all that timing will coordinate or even if it has to coordinate.”

The source also wondered how much clout Watt had with the current administration and the Republican-controlled Congress, given that he was an Obama political appointee.

“I question how much influence he actually has in Congress today without Obama and the Democrats being the minority party in both houses,” he said.

Capitala frees; GasLog firms

As for the week’s new issues, Capitala Finance Corp.’s $70 million of 6% $25-par notes due 2022 freed to trade by the end of the day.

Toward the end of the day, a source quoted the notes at $24.96 bid, $25.03 offered.

Earlier in the session, a trader quoted the issue at $24.90 bid, par offered. Another saw the notes in a $24.88 to $24.97 context.

The deal came late Wednesday, upsized from $50 million and in line with price talk.

Ladenburg Thalmann & Co. Inc., BB&T Capital Markets, Janney Montgomery Scott LLC, William Blair & Co. LLC and Wunderlich Securities Inc. ran the books.

GasLog Partners LP’s 8.625% series A fixed-to-floating rate cumulative redeemable preference units – a deal from Monday – were meantime seen closing at $25.02, a gain of 3 cents.

The $125 million deal was increased from $50 million. It freed to trade early Tuesday and is trading under a temporary ticker, “GSLGF.”

Morgan Stanley & Co. LLC, UBS Securities LLC, Stifel Nicolaus & Co. Inc. and Citigroup Global Markets Inc. were the joint bookrunners.

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