Preferred stocks lose early gains after Fed ups rates; Saratoga Investment comes upsized

By Stephanie N. Rotondo

Seattle, Dec. 14 – Preferred stocks were firm as the midweek trading day started but fell off after the Federal Reserve said it was raising interest rates.

The Wells Fargo Hybrid and Preferred Securities index declined 22 basis points for the day. The index was up 8 bps at mid-morning.

For the second time in a decade – the fist time being exactly a year ago – the central bank’s Federal Open Market Committee upped its target range, citing improved economic factors.

The new rate is 0.5% to 0.75%, up from 0.25% to 0.5%.

The decision for the hike was unanimous – a notable feat, given that previous meetings that resulted in rates staying steady had included as many as three dissents.

The committee also increased the number of rate increases expected over the coming years. In 2017, three increases are projected, another two to three in 2018 and another three in 2019.

Like the preferred space, the broader markets also traded off in the wake of the news, though the move was widely expected.

A new issue entered the market: Saratoga Investment Corp. sold $65 million of 6.75% $25-par notes due 2023, upsizing from $55 million and coming in line with price talk.

However, a trader said there were “no real markets” for the new deal as of mid-morning.

“I don’t think it was very active,” said another market source, adding that the deal was “pretty small.”

Ladenburg Thalmann & Co. Inc., BB&T Capital Markets, Compass Point and William Blair & Co. ran the books.

Among other recent issues, KeyCorp’s $500 million of 6.125% series E fixed-to-floating rate noncumulative perpetual preferred stock – a deal priced Dec. 5 – were softening, trading down a dime to $25.35.

The issue is expected to list on the New York Stock Exchange on Thursday under the ticker symbol “KEYPI.” The paper is trading under a temporary symbol, “KYYPP.”

Market trends lower

In secondary trading, the day’s most active securities were moving mostly in line with the market – that is, downward.

Ally Financial Inc.’s 8.125% series 2 fixed-to-floating rate trust preferred securities (NYSE: ALLYPA), for instance, declined 6 cents to $25.34. The issue was off by 8 cents in earlier dealings.

Wells Fargo & Co.’s 5.5% class A series X noncumulative preferreds (NYSE: WFCPX) were also lower, coming in 11 cents to $22.38. Deutsche Bank AG’s 7.6% trust preferreds (NYSE: DTK) were another loser, falling a dime to $24.27.

There were, however, a few outliers that actually managed to gain ground during the session.

Among them, AXIS Capital Holdings Ltd.’s 5.5% series E noncumulative preferreds (NYSE: AXSPE) added 6 cents to close at $21.19.

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