Annaly Capital sells massively upsized deal tighter than early talk; Fannie, Freddie rise

By Stephanie N. Rotondo

Seattle, July 25 – A new issue hit the preferred stock primary market on Tuesday as Annaly Capital Management Inc. brought an upsized $700 million offering of 6.95% series F fixed-to-floating rate cumulative redeemable preferreds.

Initial price talk was 7% to 7.125%. The size of the deal was also increased from an expected $200 million.

Once the deal launched at the larger size and tighter rate, the gray market quotes “backed off,” a market source said, adding that it was “not a surprise.”

He pegged the paper at $24.81 bid, $24.86 offered in the gray.

At mid-morning, a trader saw the issue quoted at $24.85 bid, par offered in the gray.

Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC, UBS Securities LLC, RBC Capital Markets, Citigroup Global Markets Inc. and Keefe Bruyette & Woods Inc. are running the books.

The dividend rate will be fixed until Sept. 30, 2022, at which time it will float at Libor plus 499.3 basis points.

The New York-based real estate investment trust plans to use a portion of the proceeds to redeem its $185.3 million outstanding 7.875% series A cumulative redeemable preferreds (NYSE: NLYPrA).

That issue dropped 55 cents, or 2.12%, to $25.40.

Away from the new issue, Fannie Mae and Freddie Mac’s preferreds continued to climb upward in active trading, though the preferred space as a whole continued to weaken.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were up 25 cents, or 3.65%, at $7.10. The 8.25% series T noncumulative preferreds (OTCBB: FNMAT) were up a dime, or 1.52%, at $6.70.

Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) were meantime up 33 cents, or 5.20%, at $6.68.

A market source noted that there was again no fresh news out, or at least “nothing substantive.”

However, there have been reports of new documents released as part of a shareholders lawsuit against the government that seemed to show that the Treasury knew Fannie and Freddie were about to return to a profit before they enacted the so-called “net worth sweep” in 2012.

Shareholders have argued that the sweep – which takes a majority of the GSEs’ earnings each quarter in lieu of a dividend payment – has hurt their recovery and that it was done so illegally. The documents – as well as the fact that both Fannie and Freddie have both repaid the bailout funds given to them in 2008, and then some – appear to give the shareholder argument weight.

For its part, the Wells Fargo Hybrid and Preferred Securities index was down 34 bps. The U.S. iShares Preferred Stock ETF declined 36 bps.

Investors will be looking to Wednesday’s afternoon press conference from the Federal Reserve’s Federal Open Market Committee to see how the central bank feels about current inflation levels. It is not expected that the two-day policy meeting that began on Tuesday will produce another interest rate increase.

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