Italian bond yields spike, pressure preferreds; Ally declines on potential ResCap bankruptcy

By Stephanie N. Rotondo

Portland, Ore., Nov. 9 - It was "an ugly day" for preferred stocks, a market source said Wednesday.

What was driving the market, he said, was the "big news" that Italian bonds yields "hit above 7%, and that's bad."

He explained that previously, 7% had been an "unofficial" level of tolerance for the country's debt, beyond which the nation's ability to service its debt obligations becomes more doubtful. It is also the level Portugal and Ireland crossed shortly before they received bailouts from the International Monetary Fund and the European Union.

At their highs, yields on Italian sovereign bonds hit 7.46%, the source said. Yields closed at 7.206%.

Because of yet another country to worry about in Europe, investors were dumping paper all over the place.

Ally Financial Inc. was particularly hard hit on news that the bank holding company was considering sending its Residential Capital LLC unit into bankruptcy. Ally's two series of preferreds were among the day's biggest percentage losers.

News reports that Bank of America Corp. had previously considered and then discarded a similar idea to put its Countrywide Financial Corp. unit into Chapter 11 actually helped Countrywide preferreds gain ground.

In the primary market, KKR Financial Holdings LLC's recent deal - a $225 million issue of 8.375% senior notes that priced late Monday - came back a bit from its Tuesday highs but was still considered to be doing well, given the state of the market.

Ally preferreds hurt by ResCap

Ally Financial is said to be weighing a bankruptcy option for its money-losing mortgage lending unit ResCap.

The news was not taken well by Ally investors, and the company's two series of preferreds were therefore trading down.

The 8.125% series A trust preferreds (NYSE: ALLYPA) dropped 58 cents, or 2.96%, to $19.08. The 8.5% series B preferreds (NYSE: ALLYPB) fell $1.15, or 6.27%, to $17.20.

ResCap has reportedly hired Centerview Partners LLP to advise it on a restructuring plan that could potentially include a bankruptcy filing. Ally has hired Evercore Partners Inc. to advise the parent company.

The Treasury Department is also reported to be getting involved, given that it owns a 74% stake in Ally. The Treasury attempted to sell ResCap last year but ultimately failed to find a buyer.

ResCap posted a loss of $442 million in the third quarter.

No filing for Countrywide

In related news, Bank of America previously was considering a bankruptcy filing for its struggling mortgage unit Countrywide, according to news outlets.

The idea was eventually discarded, though a bankruptcy might have "ring-fenced" parent Bank of America from Countrywide's soured loans.

Still, the news did help push up Countrywide's 7% capital securities (NYSE: CFCPB). They closed up 4 cents at $21.21.

KKR doing 'not so bad'

KKR Financial's 8.375% $25-par senior notes due 2041 were faring "not so bad, considering the state of the market," a market source said.

He quoted the issue at $24.80 bid, $24.93 offered.

Another source had pegged the notes at $24.80 earlier in the session.

The New York-based investment firm priced the $225 million deal on Monday. KKR will use proceeds to pay down debt and for general corporate purposes.

The deal freed to trade on Tuesday.

Aegon earnings upcoming

Aegon NV is expected to report earnings on Thursday. Ahead of the release, the insurer's preferreds were trending weaker with the market.

The 7.25% perpetual capital securities (NYSE: AEF) dropped 55 cents, or 2.39%, to $22.44.

Aegon is based in the Hague, the Netherlands.

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