Fannie swings to profit, sees preferreds jump; Annaly Capital prices new issue of 7.625% paper

By Stephanie N. Rotondo

Portland, Ore., May 9 - Preferred stocks gyrated a bit during Wednesday trading as concerns about Europe pressured the market and improved earnings from Fannie Mae helped prop it back up.

"Obviously, it was not a good day," one market source said. Aside from Fannie and Freddie Mac issues - along with recent deals and "story situations" - "liquidity was poor."

Fannie's sizable profit resulted in speculation that the housing market is nearing its bottom. That in turn helped give the company's preferreds and those of Freddie a boost.

In the primary arena, Annaly Capital Management Inc. priced a $275 million issue of 7.625% series C cumulative redeemable preferreds after the bell.

Fannie, Freddie climb higher

Fannie Mae reported a sizable profit for the first quarter of 2012, its first turn in the black since it was commandeered by the U.S. government in 2008.

The turn to profit resulted in some saying that it is "a sign the housing market may have bottomed," according to a trader.

That in turn helped the preferreds gain ground, and they ended up the day's biggest percentage movers.

Fannie's 8.25% fixed-to-floating-rate series S noncumulative preferreds (OTCBB: FNMAS) ticked up 9 cents, or 7.2%, to $1.34, and Freddie's 8.375% fixed-to-floating-rate noncumulative perpetual preferreds (OTCBB: FMCKJ) rose 15 cents, or 11.54%, to $1.45.

For the quarter, Fannie reported net income of $2.7 billion. That compared to a loss of $6.5 billion the year before.

With the swing to profit, Fannie also said that it will not seek additional aid from taxpayers but that it instead will pay a dividend to the U.S. Department of the Treasury in the amount of $2.8 billion.

Fannie has received $116 billion of aid from the government and has thus far repaid about $23 billion.

Despite the improved numbers and the resulting notion that the housing arena has found a floor, not everyone was jumping on that bandwagon.

One market source said the idea is "ridiculous" and that the boost to the preferreds was "all just speculation."

Annaly prices new deal

Annaly Capital Management brought a $275 million offering of 7.625% series C cumulative redeemable preferred stock on Wednesday.

There is a $41.25 million over-allotment option.

Around midday and ahead of pricing, a trader placed the issue at $24.70 in the gray market. Another market source quoted the issue at $24.60 bid, $24.67 offered after the bell but before the deal actually priced.

Also ahead of pricing, Seeking Alpha put out a report that deemed the new series of preferreds as attractive.

"The series C is very attractive relative to the [7.875% series A cumulative redeemable preferreds] as it extends call protection and brings cost to par (for a positive yield-to-call)," contributor Michael Terry wrote. "The swap from NLY-A to NLY-C (assumed ticker) makes absolute sense.

"This new Annaly series C preferred stock should be considered by income investors as a complement to an existing portfolio - either as a new addition or on swap from the existing Annaly preferred stock."

The series As closed down 71 cents, or 2.68%, at $25.83.

Settlement is expected May 16.

Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and UBS Securities LLC are the joint bookrunning managers. Barclays Capital Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co., RBC Capital Markets LLC and Stifel Nicolaus & Co. Inc. and RCap Securities, Inc. are co-managers.

Proceeds will be used to purchase mortgage-backed securities for the company's investment portfolio and for general corporate purposes, which may include the retirement of its long-term debt, additional investments and repayment of short-term debt.

Annaly is a New York-based real estate investment trust and asset manager.

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