Risk Considerations Risk Considerations   

Types of Preferred Securities

All preferred securities are subject to the risk of loss and credit risk.  Investors should not rely on information, including taxation provisions, referenced herein, as it may change.  Investors should consult with a qualified tax and financial consultant prior to investing.

Traditional Preferreds

Traditional Preferreds are the most common type of preferred. They are usually perpetual (meaning they have no maturity date) and callable at the issuer’s discretion on or after a predetermined date. They may be cumulative or non-cumulative.  Cumulative dividend rights entitle the holder to unpaid omitted dividends prior to common stock dividend payments and before the preferreds are redeemed.  The issuer does not have the obligation to pay omitted scheduled dividends in the future on shares carrying non-cumulative dividend rights.  They rank senior to common stock and junior to Trust Preferreds and debt when asserting claims on assets in the event of bankruptcy.  In some cases, depending upon individual circumstances, Traditional Preferred income may be Qualified Dividend Income (QDI) and/or eligible for the Dividend Received Deduction (DRD), providing some investors with a tax advantaged yield.

Convertible Preferreds

Convertible Preferred holders can exchange shares for a predetermined number of common shares generally any time after a date specified in the offering documents.  Some convertibles permit the issuer to convert the shares or have a mandatory conversion.  They may be cumulative or non-cumulative and rank senior to common stock and junior to other preferreds and debt.  Convertible Preferreds may also be QDI and/or DRD eligible.

Participating Preferreds

Participating Preferreds pay holders additional dividends if the issuer achieves preset financial goals as defined within the offering documents. The extra dividend is frequently set to be paid if the amount common holders receive exceeds a certain level. They may be cumulative or non-cumulative and rank senior to common stock and junior to Trust Preferreds and debt. The liquidation preference entitles holders to receive their purchase price back and participate on a pro-rata basis in any remaining proceeds that the common holders receive.  Participating Preferreds may be QDI or DRD eligible.

Trust Preferreds

A Trust Preferred, also termed a fixed rate capital security, is a hybrid security with a fixed maturity constructed when a corporation sets up a trust that sells shares to investors and uses the proceeds from the sale to buy junior subordinated debt securities from the corporation. The debt securities pay interest, instead of dividends, and are normally junior subordinated deferrable interest debentures. Maturities commonly range from thirty to fifty years with calls after five years. Trust Preferreds rank senior to other preferreds. Most have a deferrable interest clause which permits the issuer to postpone interest payments for up to five years, yet not beyond maturity.  If the issuer suspends payments, shareholders may still be liable for income taxes on the unpaid amount. Trust Preferreds generally provide the issuer certain tax and accounting advantages as compared to Traditional Preferreds.  They may be cumulative or non-cumulative and rank senior to preferred stock and junior to debt. Trust Preferreds are not QDI or DRD eligible.

Baby Bonds

Baby Bonds are frequently included when discussing preferreds. They are senior unsecured obligations or bonds of the issuer that pay interest with a fixed maturity, typically listed on a national exchange.  Baby bonds rank senior to preferreds and equal to an issuer’s senior unsecured debt.  They carry the same terms as traditional bonds, yet unlike most other bonds are are predominantly issued at $25 par amounts.  Baby Bonds are not QDI or DRD eligible.

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