Stress test results bring down Ally, Citigroup; BB&T falls despite passing test; Kayne prices

By Stephanie N. Rotondo

Portland, Ore., March 14 - Preferred stock investors were focusing on dissecting the recent release of the Federal Reserve's stress test results Wednesday.

As a result, the "primary was taking a backseat to the secondary," a source said.

Of 19 banks tested, 15 of them passed the Fed's capital requirements in the event of another financial downturn. Included among those banks that did not pass were Citigroup Inc. and Ally Financial Inc. Both Citigroup and Ally responded by saying they believe themselves to be in good financial condition and that they intend to keep trying to meet the said requirements.

Both banks saw their preferreds trading downward.

BB&T Corp. was one of the 19 banks that did pass the stress test, even given the company's intention to redeem all of its trust preferreds in 2012. But because some issues were trading at a premium, the firm's preferreds weakened some.

In the primary realm, Kayne Anderson MLP Investment Co. announced and then priced a sale of series E mandatorily redeemable preferreds during the midweek session. The new issue calendar remained hot and heavy, and traders said they expect that trend to continue, at least in the short term.

Test pressures Citi, Ally

The Fed deemed Citigroup's and Ally Financial's capital plans insufficient to deal with another potential financial crisis.

Though both banks responded by stating that they are in good financial condition and that they intend to refile their plans, investors were pushing paper around nonetheless.

Citigroup's 7.5% tangible dividend enhanced common stock (NYSE: CPH) was among the day's most actively traded securities, falling $2.05, or 1.99%, to $100.85. The 8.5% fixed-to-floating trust preferreds (NYSE: CPJ) meantime lost a nickel, closing at $25.90.

For Ally's 8.125% fixed-to-floating preferreds (NYSE: ALLYPA), the losses came to 17 cents on the day, and the issue ended at $23.64.

For its part, Citigroup noted that the Fed did not object to its plan to redeem trust preferreds in the near future. Ally said there was no objection to its paying out of preferred dividends and interest on trust preferreds.

BB&T trust preferreds decline

The Fed also did not object to BB&T's capital plan, which includes the intention to redeem all $3.27 billion of its outstanding trust preferreds in 2012 without issuing any replacement capital.

Despite the good news, BB&T's preferreds weakened. A source said that wasn't much of a surprise because the preferreds were trading at a premium.

The 9.6% enhanced trust preferreds (NYSE: BBTPB) were the most active the preferred complex and one of the day's biggest percentage losers. The preferreds fell 94 cents, or 3.47%, to $26.17.

The 8.95% trust preferreds (NYSE: BBTPA) were also on the biggest loser list, dropping 96 cents, or 3.58%, to $25.86.

The 8.1% preferreds (NYSE: BBTPC) declined 70 cents, or 2.63%, to $25.90.

BB&T is based in Winston-Salem, N.C.

Kayne Anderson sells paper

Kayne Anderson priced a $120 million offering of 4.25% series E mandatorily redeemable preferreds, according to a press release issued Wednesday.

Price talk was around 4.375%, according to a trader. The deal was originally announced earlier in Wednesday's session.

Given that the secondary market was the focus of the day, traders saw little goings-on in the gray market.

Bank of America Merrill Lynch, Citigroup Global Markets Inc. and Wells Fargo Securities LLC are the joint bookrunning managers.

The preferreds must be redeemed on April 1, 2019. The company has the option to redeem the preferreds after the first anniversary of issuance at 102% of par plus accrued dividends.

Dividends are payable monthly beginning May 1.

Settlement is expected March 21.

Proceeds will be used to make investments in portfolio companies in accordance with the company's investment objectives and policies, to repay debt, to purchase up to $10 million of its series A mandatorily redeemable preferreds and for general corporate purposes.

Kayne Anderson is a non-diversified, closed-end management investment company based in Houston.

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