Preferred market seesaws throughout session; Armour new deal fizzles; Schwab hanging in there

By Stephanie N. Rotondo

Phoenix, May 31 - Preferred stocks were "sort of up a little bit," a market source said Thursday.

"There's a little more green than red," he said. "But it was not a high-volume day."

At midday, a trader said he was "hoping for more of a market meltdown" in the preferred stock arena, but alas, "it came rallying back."

"It's a low-volume day," he added, noting that investors were a bit gun-shy as they waited for more "clarity as to what real mechanisms they have to take care of Spain.

"It's kind of a cluster out there," he added. "It seems inevitable that Spain is going to have to do some reshuffling to cover losses at their banks."

However, he also opined that Spain would not be "another Greek scenario" but more of a "long, drawn-out Irish situation."

Whatever the outcome might be, he said, the market was treating everything with "kid gloves."

In primary dealings, Armour Residential REIT Inc. priced an offering of series A cumulative redeemable preferreds, the proceeds of which will be used for investments.

The new issue was not garnering much attention.

Charles Schwab Corp.'s recently priced $425 million of 6% series B noncumulative perpetual preferreds were meantime not gaining any traction given the tone of the broader market. A source did comment, however, that he did not believe the deal to be well underwritten.

Armour deal falls flat

Armour Residential REIT priced $35 million of 8.25% series A cumulative redeemable perpetual preferred stock on Thursday, according to a late FWP filing with the Securities and Exchange Commission. Earlier in the day, the company said in a press release that it planned to sell at least $50 million of preferreds.

"It's a very small deal," a trader said prior to pricing, noting that he expected it would grow as high as $200 million.

Price talk was around 8.25%, he said, much higher than other recent deals. That was likely due to the fact that the company is a "highly levered, non-rated REIT.

"There's not a lot of interest," he said. "Not a lot of institutional involvement."

The securities were offered at $24.62 in the gray market, he said at midday.

There is a $5.25 million over-allotment option.

The public offering price is $25.00 per share.

The Vero Beach, Fla.-based company has applied to list the preferreds on the New York Stock Exchange under the ticker symbol "ARRPA."

Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Bank of America Merrill Lynch are the joint bookrunning managers. Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC are the co-managers. Junior co-managers are Ladenburg Thalmann & Co. Inc. and Sandler O'Neill & Partners, LP.

Proceeds will be used to acquire additional agency securities as market conditions warrant and for general corporate purposes.

Armour invests primarily in hybrid adjustable-rate, adjustable-rate and fixed-rate residential mortgage-backed securities issued or guaranteed by U.S. government-chartered entities.

Schwab active but lackluster

A market source said Charles Schwab's new 6% series B noncumulative perpetual preferreds freed from the syndicate Thursday after pricing on Wednesday.

However, he called the deal "not such a pretty picture."

Though he noted that the paper was actively traded - about 1.7 million shares changed hands - he also commented that the transaction was "not such a great underwritten deal.

"They pushed it a lot on size and price," he said.

At midday, a trader saw the preferreds at $24.70 in the gray market. At the end of the day, the source pegged the issue at $24.72 bid, $24.77 offered, with a volume-weighted average price of $24.71.

Charles Schwab is a San Francisco-based investment firm.

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