Outlook 2017: Preferred stock issuance could drop as rates, new president come into focus

By Stephanie N. Rotondo

Seattle, Dec. 30 – Preferred stock issuance was on the stronger side in 2016, especially as spreads were “outrageously tight,” according to Kevin Conery, a desk analyst at Piper Jaffray.

But depending on whom you asked, issuance in 2017 could decline.

According to one market source, issuance in the $25-par space was “about $30 billion.” That compared to about $15 billion in 2015.

Conery placed issuance at $28 billion, which compared to $14 billion the previous year.

Rising interest rates could be one factor that weighs on issuance.

“I would guess that having elevated yields should restrict call-and-replace capital, so I am guessing we [end up] around $20 billion to $25 billion,” the source said.

“That’s a big decrease from 2016, but 2016 was huge,” the source noted, adding that 2017 might mirror issuance after the “taper tantrum” in 2014.

Conery pointed out that the $25-par preferred was “not the issuers’ security of choice” in 2016, though there were more such deals than in 2015. When $1,000-par offerings are included, total issuance shoots up to around $70 billion – just barely below the approximately $73 billion seen in 2015.

Conery also remarked that as spreads came in, the curve was steep.

“Spreads are dramatically closer now than back in the summer,” he said. On Aug. 8, spreads were at 108 versus 220 on Dec. 15.

“That’s a big move,” he said. “As an issuer, why wouldn’t you lock in that spread and rate as long as you could?”

Adding $25-par issuance and $1,000-par issuance, Conery estimated that $60 billion to $65 billion would price in 2017.

“[Interest] rates are going to be higher,” he noted. However, he also opined that spreads should tighten further, “so it may wash out.”

Like the broader markets, the preferred stock players are unsure of how the Nov. 8 election of Republican candidate Donald Trump to the presidency will play out. As such, issuance forecasts are assuming a positive outcome once the president-elect takes office.

“Depending on how the Trump Administration goes forward, it could increase or decrease issuance,” said one trader. “I expect decreased issuance until [there is] more clarity in the second quarter of 2017.”

A financial flurry

As to the makeup of new deals, it was “not a huge year for issuance in big bank/financials,” one Chicago-based sellsider said.

For instance, Citigroup Inc. was the top issuer of 2015, raising $6.25 billion from four deals.

That accounted for 18.8% of market share.

However, come 2016, Citigroup fell to second place, issuing just $2.4 billion from two preferred stock sales. That was 8.64% of the year’s market share.

While it was not a banner year for banks in terms of issuance – the sellside source noted that it was “a decent year for issuance in [real estate investment trusts] and others” – that sector still dominated overall.

Furthermore, that trend is expected to continue come 2017.

Total new preferred stock issuance improved in 2016 – Conery noted that total issuance was “probably the third or fourth highest levels for the market ever” – as spreads narrowed and the possibility of interest rate hikes were eyed.

But there are factors that could limit issuance come 2017 – not just rates, but also the election aftermath.

Those concerns aside, market players are optimistic.

“2017 should bring more attractive levels for fixed-income investors,” said one source.

© 2015 Prospect News.
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