Morgan Stanley preferreds take hit as CDS spreads widen; Bank of America falls in sympathy

By Stephanie N. Rotondo

Portland, Ore., Sept. 30 - Preferred stocks were trading "a little crazy toward the end of the day," a market source reported Friday.

He opined that it was a combination of month- and quarter-end as well as concerns about Morgan Stanley that resulted in things getting "a little out of control toward the end."

Morgan Stanley preferreds were among the day's biggest percentage losers as its credit default swap spreads widened to more than that of most domestic and foreign brokerages and in line with Italy's largest lenders.

In sympathy, Bank of America Corp.'s preferreds were also seen getting pummeled.

Fear about Ally Financial Inc.'s mortgage lawsuit exposure wasn't winning over any investors either. The company's preferreds were among the most actively traded and ended nearly 4% weaker.

On a positive note, Xcel Energy Inc.'s preferreds were trading higher after the company said late Thursday that it will redeem all outstanding preferred issues at par plus accrued dividends.

In the new issue realm, Inland Real Estate Corp.'s recent deal freed to trade, according to a trader. The deal priced Thursday.

Morgan Stanley gets hit

Morgan Stanley preferreds got "beat up because their CDS is the widest of any bank," a trader said.

Risk is reportedly on par with Italian banks, he said.

In a report out Thursday, Moody's Investors Service said the CDS spreads could imply a rating downgrade is imminent.

One of the concerns, according to news reports, is how the brokerage is faring financially, as it relies on the debt markets rather than depositors for its funding.

Given the news, a market source said Morgan Stanley was the day's "biggest story" and that the preferreds were "certainly among the biggest percentage losers."

The 6.45% capital securities (NYSE: MSK) dropped $1.04, or 4.55%, to $21.80.

Bank of America slips

Bank of America preferreds were also weakening, and one source opined that the losses were occurring in sympathy with Morgan Stanley's decline.

The Merrill Lynch 8.625% series 8 noncumulative depositary shares (NYSE: BMLPQ) fell 52 cents, or 2.3%, to $22.09, while Bank of America's 6.25% capital securities (NYSE: BACPB) dropped 93 cents, or 4.69%, to $18.89.

Ally fears hurt preferreds

Ally Financial's preferreds were moving downward as investors feared the bank's mortgage lawsuit exposure could be more than anticipated.

The 8.5% series A preferreds (NYSE: ALLYPA) lost 75 cents, or 3.95%, ending at $18.25.

Though the Detroit-based former financing arm of General Motors Corp. has said that it put aside $829 million to repurchase bad mortgages, some are wondering if that will be adequate. And, if the company's mortgage exposure turns out to be more than expected, the company could face serious problems staying afloat.

Xcel up on redemption

Minneapolis-based Xcel Energy said Thursday it will redeem all of its preferred stock on Oct. 31.

The total value of the transaction is $108 million, plus accrued dividends.

The issues being redeemed are the $3.60 series cumulative preferreds (NYSE: XELPA) at $103.75 per share, the $4.08 series cumulative preferreds (NYSE: XELPB) at $102 per share, the $4.10 series cumulative preferreds (NYSE: XELPC) at $102.50 per share, the $4.11 series cumulative preferreds (NYSE: XELPD) at $103.732 per share, the $4.16 series cumulative preferreds (NYSE: XELPE) $103.75 per share and the $4.56 series cumulative preferreds (NYSE: XELPG) at $102.47 per share.

"They were all trading right around the call prices," a trader said Friday. The securities were trading well below the call prices on Thursday.

Inland deal frees up

Inland Real Estate's new $50 million issue of 8.125% series A cumulative redeemable preferreds - an issue that priced Thursday - freed form the syndicate Friday, a trader said.

He quoted the issue at $24.70 bid, $24.75 offered.

"No one likes preferreds right now, so I'd take that," he said.

Inland Real Estate is an Oak Brook, Ill.-based real estate investment trust.

CVPS sale OK'd

Shareholders of Vermont's largest utility company, Central Vermont Public Service Corp., voted to approve a merger with Montreal-based Gaz Metro on Friday.

A trader said that the company had been working on the deal for a while and that prior to getting approval, the electric company said it would call all of its preferred issues once the deal was given the go-ahead.

"They are all trading close to par anyway, because everyone knows it's going to happen," he said.

Gaz Metro is paying $35.25 per common share for the utility. The sale still needs to clear state regulatory hurdles.

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