Preferred market soft; Fannie, Freddie stress test results revealed; Morgan Stanley busy

By Stephanie N. Rotondo

Phoenix, April 30 – The preferred stock market was weak Thursday going into month-end.

“The long bond continues to fall, and hybrids are all off about a quarter-point,” a trader said.

The Wells Fargo Hybrid and Preferred Securities index finished off 16 basis points. The index was down 13 bps at mid-morning.

The preferred space started to come in on Wednesday as investors prepared for the latest policy statement from the Federal Reserve. Coming in the late afternoon, the central bank said it had chosen to remove any calendar date references from its policy on a potential interest rate hike, given that economic data was not as strong as it had hoped.

“[A rate hike in] June is definitely off the table,” a trader said. “September, or the fall, looks a little fuzzy.”

After ending the previous session with a negative tone, Fannie Mae and Freddie Mac preferred shares were popping early Thursday on word of a memo that was supposedly leaked from the Treasury Department. Some are pointing to the document as proof that the government was acting in bad faith when it placed the two GSEs into conservatorship in 2008.

However, the authenticity of the document has not yet been determined.

The agencies made more headlines as new stress test data revealed that the mortgage backers would need a sizable bailout in the event of a severe downturn. That put a little pressure on the preferreds, though they still closed the day with a positive tone.

Elsewhere in the secondary, Morgan Stanley & Co. Inc.’s trust preferreds continued to be actively traded. A market source said that was due to the fact that the New York-based investment bank held its semiannual fixed-income call on Thursday.

“They spent a lot of time talking about trust preferreds,” the source said, as the firm sought to clarify its strategy on how it will deal with its TruPs.

Fannie, Freddie move up

Fannie and Freddie preferreds ended higher on Thursday though down from earlier highs.

The paper began to gain steam in early trading after it was reported that a memo from the Treasury had surfaced that could be construed to show that the federal government acted in bad faith when it placed the agencies under conservatorship in 2008.

However, the authenticity of the document has been called into question, as well as its bearing on pending shareholder lawsuits.

After that news came out, it was reported that the GSEs are not as stable as some might like to believe. In the event of a severe economic downturn, Fannie and Freddie would require up to $157.3 billion in bailout funds, according to stress test results released by the Federal Housing Finance Agency.

The results could, however, bolster pending lawsuits that allege the government’s takeover of a majority of profits was illegal. Given the conscription, the agencies have been unable to build up any capital cushion.

Still, investors were pushing the paper higher, as Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) ended up 17 cents, or 3.52%, to $5.00 a share. In earlier trading, the preferreds had put on 42 cents, or 8.77%, to $5.25.

Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) were meantime up 16 cents, or 3.31%, at $5.00. The paper was up 36 cents, or 7.44%, at $5.20 at mid-morning.

Morgan Stanley stays active

Morgan Stanley’s preferreds remained active Thursday as the company held its semiannual fixed-income conference call.

Management took the opportunity to clarify its strategy on its TruPs after shocking the market by announcing a redemption of its 6.6% capital trust VI securities (NYSE: MSJ) and all of its 6.6% capital trust VII securities (NYSE: MSZ) late Monday.

The capital VII preferreds ticked up a touch to $25.114. But the 6.375% series I fixed-to-floating rate noncumulative preferreds (NYSE: MSPI) fell 2 cents to $26.10, while the 6.625% series G noncumulative preferreds (NYSE: MSPG) declined 5.8 cents to $26.072.

As previously reported, a market source told Prospect News that the redemption news was “bizarre,” given that the company had said in August that it saw its trust preferreds as a good long-term investment. Then, about a week prior to the release of the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), it was “leaked” that the investment bank had originally submitted a plan that included the redemption of the TruPs – but that plan was soon yanked in favor of what was eventually approved.

The source noted that the company even confirmed that scenario during its earnings call on April 20.

The capital VI shares will be redeemed on May 27 at par plus 11.9167 cents in unpaid and accrued dividends.

A total of $862.5 million shares will be redeemed.

In the capital VII paper, holders will receive par plus 12.375 cents on May 12.

About $1.1 billion of those securities will be taken in.

The redemption of both issues is being done concurrently with a call of the junior subordinated debentures that underlie the trust securities.

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