Principal Financial prices $1,000-par notes at 4.7%; Freddie Mac preferreds soften

By Stephanie N. Rotondo

Phoenix, May 4 – The primary preferred stock market was showing signs of life on Monday as Principal Financial Group Inc. brought $400 million of 4.7% $1,000-par fixed-to-floating rate junior subordinated notes due 2055.

The company announced plans to sell the hybrid notes early in the session, and a trader said initial price talk was in the 4.875% area.

“That just seems really rich, but they will probably get it,” he said.

The trader had not seen any gray markets for paper at mid-morning.

BofA Merrill Lynch, HSBC, Wells Fargo Securities LLC, Barclays, Deutsche Bank Securities Inc. and Goldman Sachs & Co. are running the books.

The interest rate will be fixed and payable semiannually through May 15, 2020. The notes will then pay interest on a floating-rate basis – Libor plus 304.4 basis points – and will be payable quarterly.

The Des Moines-based insurance company plans to use proceeds to redeem its outstanding 5.563% series A noncumulative perpetual preferreds (OTCBB: PFGZP), as well as its 6.518% series B noncumulative perpetual preferreds (NYSE: PFGPB).

By the bell, the series As were up $1.14, or 1.14%, at 100.94, while the Bs were off 7 cents at $25.36.

Looking ahead, a trader said a business development company had a new deal in the works that was slated for Tuesday.

As for secondary trading, the market was getting the week off to a positive start, though it drifted down slightly in the afternoon.

The Wells Fargo Hybrid and Preferred Securities index closed 10 bps higher. The index was up 16 bps at mid-morning.

Freddie earnings on tap

Freddie Mac preferreds were coming in Monday as investors readied for the agency’s first-quarter earnings release on Tuesday.

The 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) were off 3 cents at $5.00 a share. Fannie Mae’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were also weaker, falling 6 cents, or 1.19%, to $5.00.

The GSEs’ preferred securities started to trade up around the middle of the previous week, after it was reported that a memo from the Treasury had surfaced that could be construed to show that the federal government acted in bad faith when it placed the agencies under conservatorship in 2008.

However, the authenticity of the document has been called into question, as well as its bearing on pending shareholder lawsuits.

After that news came out, it was reported that the GSEs are not as stable as some might like to believe. In the event of a severe economic downturn, Fannie and Freddie would require up to $157.3 billion in bailout funds, according to stress test results released by the Federal Housing Finance Agency.

The results could, however, bolster pending lawsuits that allege the government’s takeover of a majority of profits was illegal. Given the conscription, the agencies have been unable to build up any capital cushion.

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