Fifth Third redemption fallout pressuring market; trader sees potential in RBS preferreds

By Stephanie N. Rotondo

Portland, Ore., May 23 - It was a "hairy" day for the preferred stock market, a trader said Monday.

"There's a lot of stuff happening in the world that is affecting the hybrid market," he said. "We have the makings of a perfect storm."

With global growth being called into question, the looming end of the second round of "quantitative easing" and worries about the European debt markets, "it has put pressure on preferreds across the board."

Additionally, continued fallout from last week's early redemption announcement by Fifth Third Bancorp resulted in more pressure and concerns about which shoe will fall next.

Still, one trader said he saw an opportunity in some of Royal Bank of Scotland Group plc's preferreds. As investors shift around in the credit, he speculated that the jockeying will result in buying opportunities.

In the new issue realm, UMH Properties Inc.'s recently priced deal - a $30 million issue that came Friday - was already "falling apart," according to a trader. Overall, market sources were opining that new issues could be upcoming.

"I'm assuming we are going to see more deals here, but it could be few and far between," said one trader.

Another remarked that he heard talk of a deal this week, though he did not have any further information.

Fifth Third fallout continues

Fifth Third Bancorp is reportedly reviewing trading in its 8.875% series C hybrid trust preferreds following the volatile trading activity that occurred after the company announced an early redemption of the paper - as well as trading right before the announcement was made.

Before the Cincinnati-based bank announced the call at mid-day on May 18, trading in the preferreds skyrocketed, resulting in a 3.7% decline. The shares continued to trade actively - and downward - after the news came out, but the spike in volume ahead of the announcement is causing insider-trading speculation.

After the news May 18, trading in the security was halted.

But at least one market source was hesitant to say that insider trading actually occurred.

"That was a major news announcement," he said. "It would make sense that there was a lot of volume because it changed the whole investment picture."

The source said it was possible that insider trading occurred but added that he felt it wasn't likely.

"It would have been tough to make money," he said. "You would have to short it," and then borrow it.

"That would be an issue," he said, given there is only $400 million of the issue. "It's hard to borrow an issue that small."

The preferreds (NYSE: FTBPC) traded up a penny to $25.17. The shares will be called at par of $25.00, plus accrued and unpaid dividends of about 18.5 cents.

Trader: RBS has potential

A trader said Royal Bank of Scotland Group preferreds "could potentially be a very interesting story."

He said the bank was "still sound," and that as investors move out to take profits, the shifting could result in some "buying opportunity."

Of the various RBS issues, he said the series L preferreds were "one of the more less-attractive ones." That paper (NYSE: RBSPL) gained a penny to close at $19.26.

The series S shares (NYSE: RBSPS), however, "looked cheap" at $18.62, the trader said.

"I think that's a good place to be looking," he said.

UMH issue 'falls apart'

Freehold, N.J.-based real estate investment trust UMH Properties brought a $30 million underwritten offering of 8.25% series A cumulative redeemable perpetual preferred stock on Friday. By Monday, the deal was "falling apart," according to a trader.

"Not a lot traded," the trader noted, seeing the preferreds trade as low as $24.50 before "finding support" around the $24.50-$24.55 range.

Another trader saw the paper at $24.60 about an hour and a half before the close.

"So it's a little weaker," the trader said. "But the whole market is selling off."

Proceeds will be used to purchase additional properties in the ordinary course of business and for general corporate purposes, including the repayment of debt.

Among other new issues, Seaspan Corp.'s recent $100 million add-on to its 9.5% series C preferreds (NYSE: SSWPC) did not do much to improve the shares' value.

The preferreds fell a dime to $27.05.

Broad market weakens

Citigroup Inc.'s series J preferreds were the day's most actively traded issue, according to a market source.

He said the shares fell a nickel to $25.98, on about 710,000 shares trading.

The next most active issue saw a significant decline in action with just 383,000 preferreds trading hands. That issue was J.P. Morgan Chase & Co.'s series B preferreds, which dropped 6 cents to $25.95.

Bank of America's 8.2% series H preferreds came in third, with 352,000 preferreds turning over. The preferreds closed 6 cents lighter at $26.15.

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