BofA deal prices tight, upsizes; Citigroup sells $1,000-pars; Morgan Stanley slips

By Stephanie N. Rotondo

Seattle, April 18 – The preferred stock primary market started to pick up on Monday as Bank of America Corp. and Citigroup Inc. both announced deals.

For its part, BofA said it was selling series EE noncumulative perpetual preferreds via BofA Merrill Lynch.

Price talk was around 6.125%, according to a trader, though he remarked that it would probably come in around 6%, “because of the demand on it.” His speculation later proved to be accurate, as the issue priced at 6%.

Citigroup meantime said it was planning to sell $1,000-par series T fixed-to-floating rate noncumulative preferreds.

A trader put price talk at 6.5%.

“They will ratchet that back too,” he said. Given that the 5.8% $1,000-par series N fixed-to-floating rate noncumulative preferreds were trading in a 96 to 97 context, “that’s a good indication that the Street expects them to tighten this deal.”

Pricing was in fact ratcheted down, to 6.25%.

Citigroup Global Markets Inc. ran the deal.

Away from new issues, Morgan Stanley & Co. Inc. announced its first-quarter results on Monday. While profit declined over 50% year over year, the earnings still beat expectations.

The bank’s preferreds, however, did not react positively.

Also in the news, Gulf Power Co. said it was calling all $125 million of its 5.75% series 2011A senior notes due 2051.

“That’s kind of interesting, as it’s only a 5.75% coupon,” a trader said.

The notes traded on Friday at $25.85.

The call will occur on May 18 at a redemption price of par plus accrued interest.

Bank of America upsized

Bank of America brought an upsized offering of 6% series EE noncumulative perpetual preferred stock on Monday.

The deal was initially slated to be around $250 million but came at $900 million. Pricing also tightened to 6% from 6.125%.

BofA Merrill Lynch ran the books.

Ahead of pricing, a trader saw a $24.80 bid, $24.87 offered quote in the gray market at mid-morning. After price talk was revised, he pegged the issue at $24.92 bid, par offered.

In response to the new issue, the existing 6.2% series CC noncumulative preferreds (NYSE: BACPC) were trading down 19 cents to $25.73.

The Charlotte, N.C.-based bank will use proceeds for general corporate purposes.

Citigroup comes tight

Citigroup priced $1.5 billion of 6.25% $1,000-par series T fixed-to-floating rate noncumulative perpetual preferred stock on Monday.

The deal came tight to the initial 6.5% price talk.

Post-pricing, a trader placed the new issue around 101. Another source saw the preferreds at 101.25.

The source added that the paper had already freed to trade.

As is typical when a new issue hits the market place, the 6.875% series K fixed-to-floating rate noncumulative preferreds (NYSE: C-PK) were lower on the day, slipping 29 cents, or 1.05%, to $27.34. The 6.3% series S noncumulative preferreds (NYSE: C-PS) dipped 16 cents to $25.98.

Citigroup Global Markets Inc. was the bookrunner.

Dividends will be fixed and payable semiannually through Aug. 15, 2026. At that point, the paper will begin to pay quarterly dividends at a rate equal to Libor plus a spread of 451.7 basis points.

The New York-based bank will use the proceeds for general corporate purposes.

Morgan Stanley beats

Morgan Stanley’s first-quarter earnings came in better than expected, though volatility in the first months of the year weighed on trading revenues.

Despite the earnings beat, the 6.45% capital securities (NYSE: MSK) were trending weaker, falling 8 cents to $25.66. The 6.25% capital securities (NYSE: MWR) declined 13 cents to $25.80.

For the quarter, net income dropped 53% to $1.13 billion, or 55 cents per share. That compared to a profit of $2.39 billion, or $1.18 per share, the year before.

Analysts polled by Bloomberg had predicted EPS of 47 cents.

Revenue meantime declined 21% to $7.79 billion. Analysts were expecting revenue of $7.76 billion.

Pieced out, fixed-income revenue declined 54% to $873 million. Equities trading revenue was off 9.3% year over year at $2.06 billion.

Wealth management revenue was down 4% from the previous year at $3.67 billion.

However, advisory revenue popped 25% to $591 million.

The company’s bottom line held in better than expected due in large part to cost-cutting efforts. Non-interest expense came to $6.05 billion, a decline of 14% and below estimates of $6.42 billion. Compensation expense waned 19% to $3.68 billion. Non-compensation costs meantime dwindled 6.2% to $2.37 billion.

Fannie, Freddie fall

Fannie Mae and Freddie Mac continued to top the day’s total trading volume, as investors continued to ponder whether or not a U.S. Court of Appeals panel would allow a shareholder lawsuit to proceed.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) fell 17 cents, or 4.28%, to $3.80. Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) lost 19 cents, or 4.81%, to close at $3.76.

Both issues were among the day’s biggest percentage losers.

On Friday, a three-judge panel heard nearly three hours of oral arguments in a case shareholders have brought against the government. The case alleges that the so-called “net worth sweep” was illegal and outside the bounds of the agencies’ conservatorship.

Shareholders – including hedge funds Perry Capital LLC and Fairholme Funds – took the case to the appeals court after a trial court in 2014 said there was no merit to the case.

There has been no official ruling from the appeals court.

Oil names weaken

Oil-linked preferreds experienced another sizable drop on Monday, as oil prices drifted lower.

Domestic crude fell nearly 1% on the day – though it was down as much as 4% earlier in the session – as a meeting of OPEC and non-OPEC producers in Doha, Qatar, on Sunday failed to result in a production freeze agreement. Saudi Arabia was reportedly a major holdout, refusing to participate in any such deal unless Iran agreed to also participate.

Iran, for its part, has been saying that it would not agree to a freeze until it had reached pre-sanction production levels.

Still, market chatter is that no deal is a better conclusion, as it allows the oil market more time to naturally rebalance itself. While that sentiment might have helped oil prices recover some ground, it did not erase all the losses.

Breitburn Energy Partners LP’s 8.25% series A cumulative redeemable perpetual preferred units (Nasdaq: BBEPP) closed down 39 cents, or 13.4%, to $2.52. The issue was one of the biggest percentage losers of the day.

Legacy Reserves LP’s 8% series A fixed-to-floating rate cumulative redeemable perpetual preferred units (Nasdaq: LGCYP) meantime lost 21 cents, or 5.44%, ending at $3.62. The 8% series B fixed-to-floating rate cumulative redeemable perpetual preferred units (Nasdaq: LGCYO) were also lower, falling 15 cents, or 3.92%, to $3.68.

And, Vanguard Natural Resources LLC’s 7.625% series B cumulative redeemable preferred units (Nasdaq: VNRBP) declined 11 cents, or 3.65%, to $2.90.

Ally stays active

Trading in Ally Financial Inc.’s 8.125% series 2 fixed-to-floating rate trust preferred securities (NYSE: ALLYPA) continued to be on the heavier side on Monday.

The paper rose 28 cents, or 1.16%, to $24.44. Almost 872,000 of the preferreds traded.

On Friday, a market source told Prospect News that there was “unusually high volume” in the former GMAC-linked securities, with almost 2.5 million of the preferreds changing hands. The surge in activity came after Ally formally announced on Thursday that it was redeeming the remaining outstanding 8.5% series A fixed-to-floating rate perpetual preferreds (NYSE: ALLYPB).

“There was confusion in after-hours trading,” the source said, given that the series A preferreds trade under “ALLYPB” instead of “ALLYPA.” As investors mixed up the two issues, the trust preferreds “got bid up really high.

“I believe it got as high as $25.40 before enough people figured out what was going on,” the source said.

Come Friday, market players “were shorting it, I’m sure, and basically drove the price back down to where it is supposed to be.”

The Detroit-based bank plans to redeem the nearly $700 million of outstanding legacy preferreds on May 16. Holders of the issue will receive 53 cents per share as its final dividend payment.

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