Preferred market skids as week starts; SoCal Edison selling shares; Capital One comes upsized

By Stephanie N. Rotondo

Phoenix, Aug. 17 – Preferred stocks weakened Monday, even as the straight equity markets experienced a bump following positive housing data.

The markets were initially trending downward after the Empire State Manufacturing Survey showed a sharp contraction in August.

The Wells Fargo Hybrid and Preferred Securities index closed down 11 basis points.

“Liquidity was light in the market today,” a market source said. “I do not think you can make any conclusions about market direction other than there are a lot of people on vacation.”

But while the preferred space was kicking off the week with a softer tone, two new issues hit the tape early Monday.

Southern California Edison Co.’s SCE Trust IV announced an offering of fixed-to-floating-rate trust preference securities. Capital One Financial Corp. also brought a deal, a sale of $500 million 6.2% fixed-rate series F noncumulative preferreds.

“Both deals will do well,” a trader said.

Meanwhile, Fannie Mae and Freddie Mac preferreds dominated overall trading for the day. The GSEs’ paper closed down, which one market source attributed to troubles at Claren Road Asset Management, a hedge fund that has been a “big proponent of the GSE preferreds.”

SoCal selling trust securities

Southern California Edison’s SCE Trust IV planned to offer at least $300 million of fixed-to-floating rate trust preference securities on Monday.

The deal reportedly priced after the market closed, but details were unavailable at press time.

Initial price talk was around 5%, a source reported, but was then revised upward to 5.375% to 5.5%.

Prior to pricing, the shares were seen at par, up from earlier levels around $24.80 bid.

Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and RBC Capital Markets led the deal.

When declared, distributions will be made on a quarterly basis at a fixed rate through Sept. 15, 2025. After that date, the distribution rate will float at Libor plus a spread.

The shares become redeemable Sept. 15, 2025 or upon certain changes in tax law, investment company law or interpretations at par plus accrued distributions.

The Rosemead, Calif.-based subsidiary of Edison International will use proceeds to redeem all outstanding series A floating-rate noncumulative preference shares (OTCBB: SCEDN) and for general corporate purposes.

The $100-par series As were trading down 30 cents at 100.70.

The shares will be redeemed Sept. 16 at par plus accrued dividends.

CapOne doubles in size

Capital One sold $500 million of 6.2% series F noncumulative perpetual preferred stock on Monday.

The deal was upsized from $250 million. Initial price talk was in a 6.25% to 6.375% range. That was then revised to 6.2% to 6.25%.

Just ahead of pricing, a trader pegged the shares at $24.90. Post-pricing, a market source said the issue was trading at $24.87.

Earlier in the day, a trader saw a gray market bid for paper at $24.80.

BofA Merrill Lynch, JPMorgan, Morgan Stanley, UBS Securities LLC and Wells Fargo Securities LLC ran the books.

Dividends will be payable on the first day of March, June, September and December. The shares become redeemable on or after Dec. 1, 2020 or in whole within 90 days of a regulatory capital treatment event at par plus accrued dividends.

The McLean, Va.-based financial services company will use proceeds for general corporate purposes.

Claren woes weigh on GSEs

A market source speculated that Fannie and Freddie preferreds were “probably down because of very negative article on Claren Road hedge fund.

“The story circulating is that the fund is facing almost $2 billion in withdrawals by the end of September,” the source added.

Bloomberg reported Monday that investors were looking to take out about 48% of the fund’s assets this year as losses mount up. The withdrawals began to kick up last year when the fund reported its first yearly loss due to weak returns from Fannie and Freddie.

On the news, Fannie’s 8.25% series S fixed-to-floating-rate noncumulative preferreds (OTCBB: FNMAS) declined a dime, or 2.06%, to $4.75. Freddie’s 8.375% fixed-to-floating-rate noncumulative perpetual preferreds (OTCBB: FMCKJ) dropped 18 cents, or 3.69%, to $4.70.

On a percentage basis, Claren Road’s main fund lost 7.2% in value from the beginning of 2015 through July, according to the Bloomberg piece. It then gained 1.7% during the first two weeks of August.

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