Portugal’s Espirito crisis weighs on preferred market; Wells Fargo dips ahead of earnings

By Stephanie N. Rotondo

Phoenix, July 10 – It was a “mostly red day” for preferred stocks, a market source said after Thursday’s close.

The Wells Fargo Hybrid and Preferred Securities index was down 15 basis points, or not quite 4 cents on average for $25-par issues.

“We’ve had worse days, but it’s probably one of our bigger down days in awhile,” the source said.

Driving the losses, he said, were “concerns about a European contagion, specifically out of Portugal,” referring to the recent debacle of Banco Espirito Santo SA.

The bank – Portugal’s second largest lender – said on Tuesday that it had missed a payment on some of its commercial paper. That then led to the company’s stock – as well as the stock of its affiliates, including parent company Espirito Santo International – being suspended on the Portugal exchange, “pending an announcement. And no announcement has been made,” the source said.

In late 2013, the bank and its entities were hit with allegations of accounting irregularities. That resulted in Portugal’s central bank calling for an audit, which not only found accounting issues at the parent organization, but also that the company was in a “serious financial condition.”

Though the Bank of Portugal has stated that the bank itself is protected from the default, fears are mounting and spreading into Europe. Several European securities sales have been postponed in the wake of the news.

“Investors are concerned about whether or not the crisis can be contained,” the source said.

Wells Fargo declines

Wells Fargo & Co.’s preferreds were weaker across the board, though whether that was due to a generally soft marketplace or to the bank’s earnings – out on Friday – it was not clear.

The 6.625% series R fixed-to-floating rate noncumulative perpetual preferreds (NYSE: WFCPR) were the most actively traded of the structure – and of paying securities overall, according to a market source – with just over 748,000 shares being traded. The issue ended down a penny at $28.05.

The 5.85% series Q fixed-to-floating rate noncumulative perpetual preferreds (NYSE: WFCPQ) were down a penny at $26.14.

And, the 5.2% series N class A noncumulative perpetual preferreds (NYSE: WFCPN) dropped 14 cents to $22.74.

The San Francisco-based bank will release its second-quarter results at 8 a.m. ET on Friday. Analysts polled by FactSet are predicting net income of $1.01 per share, which would compare to 98 cents per share for the same quarter of 2013.

However, revenues are expected to decline to $20.83 billion from $21.38 billion. In particular, investors will be looking to see if the bank has managed to boost mortgage refinancings and bank deposits.

Hercules fails to excite

Hercules Technology Growth Capital Inc.’s 6.25% $25-par notes due 2024 – a $100 million issue that priced Wednesday – was seen offered at $24.80, according to a trader.

However, he was not sure if the new deal had freed.

Another market source said he had not seen much in the deal either.

“It’s a tiny deal,” he said, noting it was “not exactly a well-known name.

“And 6.25% for a non-rated baby bond? It’s hard to get excited about that.”

The new issue market has been rather muted over the course of the week, but a trader speculated that “next week it should pick up a little bit...maybe.”

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