Another common equity dividend cut that leaves the preferreds unscathed! This sort of stuff does my heart good!
Fannie Mae, the largest U.S. mortgage- finance company, cut its dividend 86 percent after posting a loss that was more than three times analysts’ estimates and said the worst housing slump since the Great Depression is deepening.
…
Mudd has raised $14.4 billion since late last year and reduced the dividend from 50 cents since December, though still failed to quell concerns that the company is short of capital. As worries escalated, he dispatched executives to Asia to calm investors. Fannie’s core capital was $47 billion at the end of the quarter, up from $42.7 billion in March, after the company sold $7.4 billion of preferred stock.
The fact that they were able to finance themselves with preferreds underlines the importance to operating companies of maintaining the dividends … Fannie Mae issued $2-billion at 8.25%, $2.25-billion at 8.75% + mandatory conversion and $7-billion at LIBOR+423 last December. The convertable issue, of course, cannot be considered a fixed income security … but the extra security of the dividend until conversion is quite valuable!
The UK Financial Services Authority has concluded its investigation into the HBOS share collapse. Assiduous Readers will remember that the HBOS rights issue flopped. Not suprisingly:
Despite the likelihood that the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt by individuals to profit by manipulating the share price.
Of interest is:
The effect of algorithmic trading strategies, which amplified the impact of the initial downward trend in the HBOS share price.
My expectation would have been that algorithmic trading strategies would cushion the downward trend, rather than amplifying it, as swaps between banks became more attractive. Certainly, “algorithmic” doesn’t mean anything in itself, but I would be most interested in learning the details of this automated positive feedback loop … and I bet the FSA is puzzling over this type of trading even now!
Well, a week-odd in to August and things are looking a little better! PerpetualDiscounts are up every day month-to-date, totalling 1.38%. They have had only one down-day (July 28) since the trough on July 16 and are now up 6.62% since trough-date. Average dividend yield is now 6.23%, equivalent to 8.72% interest for taxable holders with a 1.4x equivalency factor; long corporates now yield about 6.15% so the PTIE spread is 257bp … still above the previous ten-year high of 250bp.
| Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30 | |||||||
| Index | Mean Current Yield (at bid) | Mean YTW | Mean Average Trading Value | Mean Mod Dur (YTW) | Issues | Day’s Perf. | Index Value |
| Ratchet | N/A | N/A | N/A | N/A | 0 | N/A | N/A |
| Fixed-Floater | 4.65% | 4.37% | 58,468 | 16.44 | 7 | +0.0879% | 1,098.8 |
| Floater | 4.10% | 4.13% | 52,120 | 17.11 | 3 | 0.5182% | 900.2 |
| Op. Retract | 4.97% | 4.23% | 121,433 | 2.83 | 17 | +0.1966% | 1,046.5 |
| Split-Share | 5.35% | 6.00% | 57,927 | 4.46 | 14 | +0.2051% | 1,035.8 |
| Interest Bearing | 6.28% | 6.78% | 50,634 | 5.27 | 2 | -0.3571% | 1,115.7 |
| Perpetual-Premium | 6.19% | 6.15% | 71,049 | 2.27 | 1 | -0.0396% | 987.7 |
| Perpetual-Discount | 6.18% | 6.23% | 203,557 | 13.58 | 67 | +0.2989% | 859.6 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| CM.PR.P | PerpetualDiscount | -2.3278% | Now with a pre-tax bid-YTW of 6.90% based on a bid of 20.14 and a limitMaturity. |
| BNS.PR.K | PerpetualDiscount | +1.1429% | Now with a pre-tax bid-YTW of 5.70% based on a bid of 21.24 and a limitMaturity. |
| CM.PR.D | PerpetualDiscount | +1.1899% | Now with a pre-tax bid-YTW of 6.83% based on a bid of 21.26 and a limitMaturity. |
| CM.PR.H | PerpetualDiscount | +1.3582% | Now with a pre-tax bid-YTW of 6.77% based on a bid of 17.91 and a limitMaturity. |
| PWF.PR.E | PerpetualDiscount | +1.4014% | Now with a pre-tax bid-YTW of 6.16% based on a bid of 22.43 and a limitMaturity. |
| SLF.PR.A | PerpetualDiscount | +1.4256% | Now with a pre-tax bid-YTW of 6.28% based on a bid of 19.21 and a limitMaturity. |
| POW.PR.D | PerpetualDiscount | +1.4677% | Now with a pre-tax bid-YTW of 6.10% based on a bid of 20.74 and a limitMaturity. |
| CM.PR.I | PerpetualDiscount | +1.5936% | Now with a pre-tax bid-YTW of 6.65% based on a bid of 17.85 and a limitMaturity. |
| RY.PR.W | PerpetualDiscount | +1.6203% | Now with a pre-tax bid-YTW of 6.13% based on a bid of 20.07 and a limitMaturity. |
| BAM.PR.B | Floater | +1.6316% | |
| CM.PR.J | PerpetualDiscount | +1.7109% | Now with a pre-tax bid-YTW of 6.59% based on a bid of 17.24 and a limitMaturity. |
| ELF.PR.F | PerpetualDiscount | +1.8182% | Now with a pre-tax bid-YTW of 6.85% based on a bid of 19.60 and a limitMaturity. |
| MFC.PR.C | PerpetualDiscount | +1.9191% | Now with a pre-tax bid-YTW of 5.82% based on a bid of 19.65 and a limitMaturity. |
| WFS.PR.A | SplitShare | +2.2976% | Asset coverage of 1.6+:1 as of July 31, according to Mulvihill. Now with a pre-tax bid-YTW of 8.10% based on a bid of 9.35 and a hardMaturity 2011-6-30 at 10.00. |
| BAM.PR.J | OpRet | +2.4765% | Now with a pre-tax bid-YTW of 6.07% based on a bid of 24.00 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (6.49% to 2012-3-30), BAM.PR.I (6.70% to 2013-12-30) and BAM.PR.O (7.21% to 2013-6-30). |
| POW.PR.A | PerpetualDiscount | +2.5101% | Now with a pre-tax bid-YTW of 6.18% based on a bid of 22.87 and a limitMaturity. |
| CU.PR.A | PerpetualDiscount | +2.9399% | Now with a pre-tax bid-YTW of 5.92% based on a bid of 24.51 and a limitMaturity. |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| CM.PR.G | PerpetualDiscount | 428,195 | Nesbitt crossed 400,000 at 20.00, then another 17,500 at the same price. Now with a pre-tax bid-YTW of 6.78% based on a bid of 20.12 and a limitMaturity. |
| CM.PR.I | PerpetualDiscount | 98,660 | CIBC crossed 91,500 at 17.86. Now with a pre-tax bid-YTW of 6.65% based on a bid of 17.85 and a limitMaturity. |
| CM.PR.J | PerpetualDiscount | 88,839 | CIBC crossed 81,500 at 17.26. Now with a pre-tax bid-YTW of 6.59% based on a bid of 17.24 and a limitMaturity. |
| RY.PR.K | OpRet | 60,781 | Nesbitt crossed 25,000 at 25.00, then CIBC crossed 27,100 at the same price. Now with a pre-tax bid-YTW of 4.00% based on a bid of 24.97 and optionCertainty 2008-9-7 at 25.00. Has been called for redemption August 22 at 25.00. |
| RY.PR.H | PerpetualDiscount | 51,480 | Nesbitt bought 10,000 from CIBC at 24.34, CIBC crossed 10,200 at 24.30, Nesbitt bought another 11,800 from CIBC at 24.34, then CIBC crossed another 16,300 at 24.30. Now with a pre-tax bid-YTW of 5.84% based on a bid of 24.26 and a limitMaturity. |
There were seventeen other index-included $25-pv-equivalent issues trading over 10,000 shares today.
Update: Assiduous Reader prefwatcher takes me to task in the comments for not hating the Fannie Mae preferreds and suggests I look at the charts … so here’s the common vs. FNMPRG:
Clearly, not pretty for the preferreds – but, my point was, even less pretty for the common.
My glee at seeing common dividends cut while preferreds continue rolling along is, perhaps, a little exagerated … but there are so many commentators who take the view that preferred dividends are easy to cut I take great pleasure in pointing out contrary evidence. Fannie’s preferred stock is rated A1 Review-Negative by Moody’s, by the way. This note has also attracted attention at FWR.
It does your heart good to see Fanny retain the dividend on its preferreds?? Really??? If I owned any of them I would have a heart attack! Most of Fanny’s preferreds have fallen by more than 70% in the past 12 months. If the price of housing continues to fall in the US…which seems likely… Fanny will go under and their preferreds will go to zero. Even if the US Government rescues Fanny all of the shareholders will be wiped out. Take a look at the charts of FNMPRF, FNMPRG, FNMPRH on the NYSE if you want a good scare.
I’ve added some material to my post above.
FNMPRG has certainly been hit hard – but when it’s trading at $14, dividend of $2.29 and still and investment grade rating … the question is whether or not they’ve been hit too hard. But it was not my intention to comment on the relative investment merits of Fannies preferreds and common – only to point out that times need to get really, really tough – tougher than they are now – for a struggling company to cut the preferred dividend.
yes, I would have to agree with prefwatcher. the fact that they didn’t cut their dividend on prefs kinda tells me that they still need prefs in good stead so they can continue to sell more to the market. if they cut the pref dividend at the same time as the common, they would probably have no reasonable financing options left. if I owned any of that stuff, I would take the common cut as an early warning that the prefs are junk and sell them mighty fast. do you use the same thinking when you invest for your clients? I’d be a little worried if you do!
the fact that they didn’t cut their dividend on prefs kinda tells me that they still need prefs in good stead so they can continue to sell more to the market. if they cut the pref dividend at the same time as the common, they would probably have no reasonable financing options left.
I agree. This is a major factor that makes preferred dividends much safer than some think … not totally safe, of course, but it does mean that issuers don’t take the decision to suspend a preferred dividend lightly.
if I owned any of that stuff, I would take the common cut as an early warning that the prefs are junk and sell them mighty fast.
And so do a lot of people; which is why it is important to differentiate between price and value. To come up with an independent estimate of the value of the Fannie Mae prefs, I would have to look a lot more deeply at their financials than I have done. As it is, I am merely pointing out that a slashing of the common dividend has not – yet – implied a cut in the preferred dividends.
do you use the same thinking when you invest for your clients?
In it’s 7+ year history, MAPF has held two preferred issues where the issuer has cut the common dividend: TRP back in 2001, an immensely profitable position; and BBD in 2003, which turned out OK.
In both cases, I very nervously reviewed the financials and concluded that the preferreds were of good quality – not as good as they had been before the companies ran into trouble, certainly, but not junk either.
In both cases, the common dividend cut led to lots of people concluding that the preferreds were junk and selling; there was a huge difference between price and value for quite some time.
Furher to the above this crossed the wire today Aug 11, 2008
Standard & Poor’s Ratings Services affirmed the stable AAA ratings on the senior debt of Fannie and Freddie, citing the “strong explicit and implicit U.S. government support these securities hold in the marketplace.” However, it also cut to A- the ratings on their preferred stock and subordinated debt, down three notches.
Further to prefwatcher’s news item above, please read the following: and since when does being placed at a “disadvantage” cause warmness in one’s heart?
as far as your bombardier and transcanada examples go, that’s nice, but how about BCE Development? remember that on back in 1985? they cut the common dividend, and declared several series of prefs. only problem is they went bankrupt just before the pay date on the prefs. prefs were valueless. how about Central Guaranty Trustco? that was back in 1988. they cut the common dividend and declared several series of prefs. then they got bought by TD Bank for about 1 cent on the dollar and never paid the pref dividends just before those went off the board. how much experience do you have as a pref fund manager anyway???????
” . . . The rating company cut the ratings after the two
Congressionally chartered companies reported increased credit
losses for the second quarter, and also following creation of a
new regulatory structure that places holders of subordinated
debt and preferred stock at a disadvantage.
Preferred stock and subordinated debt ratings for both
companies were downgraded three notches to “A-minus” from
“AA-minus.”
Fannie Mae’s risk-to-the-government rating was lowered to
“A” from “A-plus,” while the designation for Freddie Mac was
cut to “A” from “AA-minus,” according to S&P. The rating
measures a company’s creditworthiness without government
support.
“The lower risk-to-the-government rating reflects the
company’s worsening financial profile, which is pressured by
the continued home price declines in some of its key markets,
higher credit-related expenses, and capital challenges,”
Victoria Wagner, an S&P analyst said in a statement. . . .”
when does being placed at a “disadvantage” cause warmness in one’s heart?
When other investors conclude that “disadvantage” means exactly the same thing as “junk”, sell without any further analysis and drive the price down further than can be fundamentally justified.
The world in general, and the investment world in particular, is filled with shades of grey. There is a very wide gulf between “rock solid good as gold” and “worthless junk”.
how about BCE Development?
I didn’t buy those prefs.
how about Central Guaranty Trustco?
I didn’t buy those prefs either.
What’s your point? That prefs can default? We all know that already.
how much experience do you have as a pref fund manager anyway???????
I stand on my record. What do you stand on?
Preferred stock and subordinated debt ratings for both
companies were downgraded three notches to “A-minus” from
“AA-minus.”
So now S&P has assigned the same rating to Fannie Mae’s prefs as it has assigned to our very own CIBC and Bank of Montreal. Our National Bank is rated at BBB+.
Bank of Nova Scotia is rated higher, at A, as is Royal Bank and TD.
newtoprefs, for somebody who claimed on July 25 to be “pretty new to this”, you seem to have very strongly held opinions; and it seems to be very important to you that everyone agrees that Fannie Mae prefs are worthless junk with no positive features whatsoever. Why is this?
yes, I am new to this as somewhere I chose to place my own money. I hope you agree that researching and checking history on something like this makes sense before actually doing it. or in my case, since I’ve started doing it. fannie mae prefs are very possibly junk, but I’m not jawboning them to improve a short position here if that’s what your impying. if I was gonna do that, I’d look for a place that has a few more readers!!!!!!!!!!!! and just because I’m newtoprefs, doesn’t mean I’m all that junior to the market, or in age , unfortunatly. I was actually considering buying some of your fund units, or maybe subing to your letter, but i’m not yet comfortable with your thinking, or your results actually. impressive to you, but not that good to me I think. you should have been able to see the signs of the pref drop earlier this year, and sold out since your so close to it. then you could have bought back and made some real money for your clients. not a crystal ball reader I know, but you should have seen the signs. your Fannie comments confirm that you don’t always seem to get it. more to read and think about I would say.
btw, if you had a choice to buy either Fannie prefs, or National Bank, or BMO or CIBC for your fund today, which would you go with?
which would you avoid like the plague?
if the answers seem obvious to you, then that at least shows you don’t even believe some of the stuff you write!!!!!!!!!!! it also shows that S&P ratings arent worth the paper they’re printed on. if the answers arent obvious, that shows you arent that experienced at what you do
what do you write in that preferredletter anyway????!!!!!
*lol*
newtoprefs appears to be here mainly for the purpose of being insulting; the writing style is similar to madequota‘s.
Questions, criticism and discussion are always welcome here; ill-informed insults are not.
newtoprefs has been banned, until such time as I obtain a non-anonymous eMail address and confirm his or her identity.
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