No. of Recommendations: 2
Today, most financial preferreds (REITs, banks and retail brokerages), issue their preferreds as 'Trust Preferreds' or 'REIT Trust Preferreds' (a variant on trust preferreds), whereby the financial company issues bonds to a trust, who then cuts itself up into $25 pieces and is sold, usually through retail cahnnels, to investors. The company pays the trust each quarter the bond interest, which then pays the preferred shareholders. This allows the financial entity to pay the preferred dividends with pretax dollars. But the Federal Reserve has some requirements of these preferreds to qualify as Tier I capital, some of which are the preferred stock must guarantee (i.e. not redeem the preferred shares) for not less than 20 quarters from issue (5 years), the shares must be cummulative and if dividends are suspended for a certain number of quarters (I believe its greater than 10 quarters...but not sure on this), then the preferred shareholders must be given certain voting rights (MPG-PA just went through this with their suspended dividend)....and so forth. But a couple of trade-offs to investors is that these preferred dividends are not available for favorable tax treatment, and, the real kicker, suspended dividends must be treated as OID interest income by the shareholder, even though the dividends are suspended. However, this does not seem to be the case with REIT preferreds.

Preferred stock, whether regular or trust preferreds, almost never have a maturity date, and are at risk of being perpetual if the company never redeems them. A sort-of preferred stock maturity date exists with most trust preferreds, as the bonds issued to fund the preferred trust do have a maturity date....usually 30 to 40 years out, and most of the prospectii I've read say that these bonds and the preferred stock they fund, will be redeemed at the bond's maturity date, although others say that the board of directors reserves the right to reissue the bonds at market rates when the original bonds mature.

And I've never seen or heard of a situation where a suspended preferred stock MUST be paid other than before a common dividend is paid, cummulative or not. This explains why MPG-PA, which has been suspended since 2008, is currently priced at about $19/share. The analysis I've seen seems to think that MPG, in accordance with the REIT rules, will soon have REIT taxable income, which means the REIT must pay this out as a dividend to maintain their REIT status, and that, it would appear, the preferred-A shares will get paid first.

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.