Preferred stocks tank as broad markets drop; funds take a beating; new issues ‘hammered’

By Stephanie N. Rotondo

Phoenix, Aug. 24 – The preferred stock market was taking a beating as the broader markets sold off amid continued global economic concerns and yet another major decline in oil.

“Some stuff is just way out of whack,” a trader said. “As money flows out of these funds” – the iShares U.S. Preferred Stock Index (NYSE: PFF) dropped to as low as a $32 handle, down from its typical levels around $39, in early trading – “people have to figure out what to sell to get cash.”

“This morning was flash crash-esque in PFF and a host of other funds,” a second trader said. “Some [preferred stock funds] were printing down to ridiculous levels.”

The PFF index did manage to pare some losses, ending down 1.67%.

The first trader noted that bigger issues would likely feel the most burn, while fixed-to-floating issues would hold up a little better.

The day’s overall drop came as China experienced yet another equity sell-off, increasing fears of an economic slowdown in the world’s second-largest economy.

Still, the weakness in the market – which has been raging since last week – has caused some to opine that an interest rate hike from the Federal Reserve will be pushed off until December.

“There’s no real reason to raise rates now, except to just raise rates,” the trader said.

The Dow Jones industrial average ended down nearly 600 points, which was better than the intraday lows. Oil prices were also weaker, dropping 5.69% to $38.15 per barrel.

The Wells Fargo Hybrid and Preferred Securities index was meantime down 1.28%, or 128 basis points.

“New issues got hammered,” a trader said.

Capital One Financial Corp.’s $500 million of 6.2% fixed-rate series F noncumulative preferreds – a deal priced Aug. 17 – were down 26 cents, or 1.05%, at $24.54. National General Holdings Corp.’s $100 million of 7.625% $25-par subordinated notes due Sept. 15, 2055 (Nasdaq: NGHCZ) were also in decline, falling 95 cents, or 3.98%, to $22.90.

The latter issue came Aug. 11.

Initially, Southern California Edison Co.’s SCE Trust IV’s $325 million of 5.375% fixed-to-floating rate trust preference securities – another deal from Aug. 17 – were inching up, trading 3 cents higher at $25.40. However, the market’s softness caught up with the issue, which finished off 30 cents, or 1.18%, at $25.07.

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