Preferreds strong as second quarter begins; new deals on tap; Tsakos greenshoe exercised

By Stephanie N. Rotondo

Seattle, April 3 – The preferred stock market was firm at the start of the second quarter.

The Wells Fargo Hybrid and Preferred Securities index traded up 72 basis points, while the U.S. iShares Preferred Stock ETF was up 68 bps.

“I’d say overall market performance was driven by movement in Treasuries,” one market source said. The 10-year Treasury gained 50 bps and the 30-year added 84 bps.

But while the market had a positive tone, liquidity was weak.

One trader remarked that a fair amount of desks were empty due to vacations. He also noted that it was the start of the quarter and that investors were waiting to see how things kicked the period off.

“I am hearing a couple of new deals this week,” he added, though he was not sure who the issuers would be.

Still, as new issue supply has been lackluster since the start of the year, the deals could be snapped up fairly quickly.

After the market closed, two new deals were added to the calendar. TICC Capital Corp. said it was selling $50 million of $25-par notes due 2024. GWG Holdings Inc. meantime said it was offering $150 million of $1,000-par series 2 redeemable preferred stock.

As for recently priced deals, Tsakos Energy Navigation Ltd.’s $115 million of 9.25% series E fixed-to-floating rate cumulative redeemable preferreds – a deal priced late Wednesday – were seen slipping 3 cents to $24.95, though the weakness in the issue came in the final minutes of trading. Earlier in the session, a trader quoted the paper at $24.90 bid, $24.95 offered, as another source saw the issue rising 11 cents to $25.09.

A market source reported Monday that its $15 million greenshoe had been fully exercised, bringing the total amount outstanding to $115 million.

The deal – led by Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC, UBS Securities LLC, Citigroup Global Markets Inc. and Stifel Nicolaus & Co. Inc. – came upsized from $50 million and in line with price talk. The preferreds are trading under a temporary ticker symbol, “TNPEP.”

Fannie, Freddie fall

Fannie Mae and Freddie Mac preferreds dominated the trading day as investors grew more concerned about possible cuts to the corporate tax rate and how that will impact the GSEs.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) declined 36 cents, or 5.46%, to $6.23. The 8.25% series T noncumulative preferreds (OTCBB: FNMAT) dropped 43 cents, or 6.64%, to $6.05.

Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) then lost 29 cents, or 4.64%, closing at $5.96.

On Friday, an analyst at BMO Capital Markets issued a report saying that if the Trump administration goes forward with a plan to cut corporate tax rates to 20% from 35%, the mortgage agencies could write down $21 billion in tax-related assets.

Those so-called deferred tax assets are used similarly to tax credits, allowing the companies to reduce their tax liability. In cutting the corporate rate, those assets would lose a fair bit of value.

But that isn’t the end of the trouble, Margaret Kerins said in the report. In such an event, Fannie and Freddie could be forced to go back to the Treasury for more funding, as neither have any capital buffers to help them in the event they post a loss.

“However, the potential for renewed draws is likely to be politically unpopular and may spark preemptive Treasury action and Congress to prioritize GSE reform in addition to headline risk,” Kerins wrote.

© 2015 Prospect News.
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