Bespoke, as well as a quick glance at Primus notes (ticker: PRD), confirms that preferred shares got crushed pretty much across the board. Because preferred issues tend to be concentrated in the financial sector, there is obviously a lot of headline risk built in - and with the volatility brought about by the GSE drama, today must have been as good a day as any other to take everything out to the woodshed. Still, the steepness of the decline is surprising; an index of preferred stock is 20% below its 50-day moving average.

Primus is the only company I closely follow that issues preferred notes, so it’s a natural extension of my model to analyze those, and it raises a noteworthy point of differentiation on a day like this. Most of the big losers (see chart below) - things like Washington Mutual (WM), Nat City (NCC), and Fifth Third (FITB) - had the common down double-digits, and the preferreds down upwards of 20%.

Primus preferred notes got whacked today down 27% on heavy volume to 27% of par with a 26% dividend yield, but Primus common (PRS) was down “only” 5%. The action in the common may be due to Tom Brown, one of Primus’ largest shareholders, repurchasing some of the stake he sold off at the end of last month.

I’ve been contemplating buying some of the preferred notes for a while, and am feeling quite happy now for holding off. While I’m not getting near any of the banking issues, Primus’ common stock passes my stress test for credit losses (3x the peak investment grade default rate experienced in the last recession, matched with the lowest recovery rate on defaulted debt realized since 1920, with these conditions running through mid-2010), so the preferred notes effectively give an additional capital cushion of over $100 million. While it isn’t possible to represent that as a linear amount because of interest earned on capital, my current estimate for credit losses on Primus’ existing swap portfolio using the above scenario is $526 million. This certainly makes the exceptionally high yield of the preferred notes look attractive, to say the least.

With how brutally sharp the selloff in PRD has been, I want to jump because the specific indicators are oversold so much, and I’ve been keeping cash on hand for times of broad stress and confusion like right now. While a few broad market indicators have started to find support, the words of Todd Harrison at Minyanville - things will get ugly if the financials don’t catch a bid - continue to ring in my head. As much as I’d love to lock in upwards of a 25% yield that actually looks much safer than the market implied (from a quant credit risk agency like Moody’s KMV), I honestly don’t know that we’ve reached maximum pessimism in debt guaranty. I’d call it a sector issue and not a Primus-specific issue, but that hasn’t mattered much since I started purchasing the common; so I’m being cautious. Most aggressive case is that I purchase a small block of preferred tomorrow, and look to scale in the rest over a few more weeks, but I doubt I act that quickly.

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In other news, Accrued Interest notes that credit default swap rates on the United States doubled last week. We live in extraordinary times…

Disclosure: I own Primus common (PRS).