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HYBRID PREFERRED STOCKS

  • Trust Preferreds
    • - This "Family" of hybrid preferreds has characteristics of both bonds and preferred stock s , but is essentially a bond. They are issued by a business trust, which is established by a parent company (Example ABC Corp sets up ABC Capital Trust). The Trust will issue the $25.00 par value hybrid preferreds and lend the proceeds to its parent by purchasing a long- term (usually 30 year) subordinated bond. When the Trust receives interest payments on the bond, they pass them directly to the preferred stockholder as either quarterly or semi-annual distributions. Trust Preferred shareholders get paid before regular preferred and common stock shareholders. Many Trust Preferreds have a deferrable interest clause. This means the underlying bond has a feature all owing the issuer to defer interest payments for up to 5 years. During any deferral period the interest accrues and is taxable for the holder.
  • Third Party Trust Preferreds
    • - This "Family" is similar to Trust Preferreds except they are issued by a third party. A "Depositor" corporation, usually a wholly-owned limited-purpose subsidiary of a large brokerage firm, will buy a block of bonds of a particular company, deposit them into a Trust they establish which in turn will issue the $25.00 par value preferreds. These preferreds are sometimes given acronyms such as CorTS, CABCOS, CBTCS, SATURNS and PPLUS. The acronyms are the "brand names" of the underwriter or affiliate, and does not relate to the company that issued the underlying bond. The securities are sometimes hard to discern since they often are titled by the name of the Depositor corporation such as Structured Products or Lehman- ABS. ISI newsletter shows these securities under the name of the underlying bond issuer. Some of these issues have a deferrable interest clause. This means the underlying bond has a feature allowing the issuer to defer interest payments for up to 5 years. During any deferral period the interest accrues and is taxable for the holder.