Market expected to be muted ahead of holiday; recent deals trade up; GSE paper softens

By Stephanie N. Rotondo

Seattle, Aug. 29 – Preferred stock traders were forecasting a quiet week ahead of Labor Day weekend.

“There is nothing moving,” a trader said. “I think it will be like this for the rest of the week.”

The market opened Monday’s session a touch softer, with the Wells Fargo Hybrid and Preferred Securities index trading down 1 basis point. The index eventually ended 5 bps higher.

Issues priced during August continued to gain momentum.

Qwest Corp.’s $977.5 million of 6.5% $25-par notes due 2026 (NYSE: CTBB) – consisting of $850 million sold on Aug. 11 and a fully exercised greenshoe of $127.5 million – were dominating the day in early trading, rising 9 cents to $25.76. The issue ended the day up 11 cents at $25.78.

Legg Mason Global Asset Management’s $500 million of 5.45% $25-par junior subordinated notes due Sept. 15, 2056 (NYSE: LMHB) were meantime seen ticking up 4 cents to $25.05.

That deal came Aug. 3.

Among Entergy-linked deals, Entergy Louisiana LLC’s $270 million of 4.875% $25-par collateral trust mortgage bonds due Sept. 1, 2066 (NYSE: ELC) were pushing up a dime to $24.97, while Entergy Arkansas Inc.’s $410 million of 4.875% $25-par first mortgage bonds due Sept. 1, 2066 (NYSE: EAI) jumped 7 cents to par.

Entergy Louisiana priced Aug. 10. Entergy Arkansas came Aug. 9.

Ackman has hope for GSEs

Bill Ackman made some optimistic comments about the future of Fannie Mae and Freddie Mac in his mid-2016 letter to Pershing Square shareholders.

The market, however, appeared nonplussed, as the GSEs’ preferreds weakened in Monday trading.

Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) dipped 3 cents to $3.99, while Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) slid a penny to $4.09.

In the letter, Ackman noted that the mortgage guarantors have been profitable, but that because of the government’s “net worth sweep” – enacted in 2012 – the agencies have been unable to build any capital cushion, thereby making another draw from the Treasury more likely.

“As the risk of capital draws from the Treasury increases, we believe that Congress will become increasingly focused on seeking a permanent resolution for Fannie and Freddie,” Ackman wrote.

The letter also noted the various legal battles being waged in regards to the sweep and how as more government documents are released, the more it appears that the current party line – that Fannie and Freddie were in a “death spiral” – was all smoke and mirrors.

Ultimately, Ackman thinks that a solution to the current predicament will be reached.

“We believe a new administration, which did not implement the Net Worth Sweep, will be more conducive to implementing a sensible resolution for Fannie and Freddie which benefits all stakeholders including tax payers, home owners and shareholders,” the letter said.

© 2015 Prospect News.
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