Preferreds skid amid weak economic data, recover some losses; Resource Capital frees to trade

By Stephanie N. Rotondo

Phoenix, June 4 - The preferred stock market was swimming in a sea of red early Wednesday as new economic data failed to meet expectations.

"It's kind of been an ugly day out there," a market source said.

The Wells Fargo Hybrid and Preferred Securities index was down 100 basis points at mid-morning. However, the index managed to recoup some of those losses, and it finished the day down 37 bps - just under a dime on average for $25-par issues.

The ADP National Employment Report for May was released Wednesday, showing that private employers added 179,000 jobs during the month of May. That was down from the 215,000 jobs added in April and well below expectations of 210,000 jobs.

Still, the data indicated that employers needed only 113,000 additional jobs in order to break even with pre-financial crisis levels.

The Commerce Department also released a report at midweek that showed the U.S. trade deficit widening to its highest point in just over a year.

The trade deficit grew by 6.9% in the last month.

The number was attributed in part to an increase in imports, especially in consumer goods. However, that could indicate that demand is picking up, which could then result in increased supply domestically - a move that could spur economic growth.

Theories

Still, even with the fresh economic data, one source wasn't sure what was driving the preferred market lower.

"It's recovered from the lows, but there's been pretty sizable losses over the last two days," he said, noting that the Wells Fargo index had dropped 88 bps in the last two sessions. By means of comparison, he said that erased about half the gains earned in May.

One theory being "bandied about," he said, was that an investor was shorting the iShares U.S. Preferred Stock ETF.

"If that happens, they could be liquidating into the market," he said. Whether or not that theory was true remained to be seen, he remarked.

From a fundamental perspective, there was "no good reason" for the market to be under so much pressure. The catalyst could be a technical factor, he said, but even then, there were no clear answers as to what that factor might be.

Furthermore, there was evidence that "something bizarre was going on today," the source said, as Allstate Corp.'s planned offering of series F fixed-rate noncumulative perpetual preferred stock via Incapital LLC's Leopards program "went pretty well. They shut it down early."

The offering was originally slated to be shopped around through June 9, but instead, books closed around 3:30 p.m. ET on Wednesday. The source noted that such a thing would not have happened if there was really something fundamentally wrong in the market.

The source said the deal was capped at $225 million, but he was not sure if pricing was going to be revised.

Initial price talk was in the 6.25% area.

The deal is expected to come as early as Thursday.

Resource Capital frees up

Resource Capital Corp.'s $110 million of 8.625% series C fixed-to-floating-rate cumulative redeemable preferreds had yet to free as of mid-morning, a trader said.

The issue priced Tuesday before the market closed.

The trader quoted the new paper at $24.70 bid, $24.77 offered.

Another market source said the deal freed up around 10:30 a.m. ET, seeing the shares trading in a $24.70 to $24.80 context all day.

Morgan Stanley & Co. LLC and UBS Securities LLC were the joint bookrunners. Deutsche Bank Securities Inc. and Keefe Bruyette & Woods acted as joint lead managers. MLV & Co. LLC was the co-manager.

The dividend will be fixed until July 30, 2024, at which time it will begin to float at Libor plus 592.7 bps.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.