No. of Recommendations: 3
BruceCM,

You wrote, ... or a trust preferred (issued by a bank) ...

Nit: A trust preferred doesn't have to be issued by a bank - it's just that investment banks and other financial institutions are usually the ones with the legal expertise to create them. Also they're called "Trust preferreds" because they are issued by a Trust that has been separately incorporated and not the entity that needed the funding. This can be an important detail if the company that created or runs the Trust becomes bankrupt. (See the Lehman Brother's Trust preferreds that are still on-going concerns and still paying dividends.)

In general such a Trust is considered an investment trust - much like a mutual fund - and holds some set of underlying securities that generate the revenue that pays the dividends to the preferred shareholders. The common stock is basically worthless, but usually held by the issuer so as to retain functional control of the Trust. It's usually worthwhile to understand the type of securities the Trust preferred actually holds and what security interests secure the payments before you buy a trust preferred, because that's really what you are investing in.

Also there are so-called Capital Trust Preferreds. Capital trust preferreds are so-called because the trust was used to raise capital required by a regulator. (Usually bank, but not always.) You should be careful about participating in capital trusts. They usually hold junior debt so are usually worthless if the issuer files for bankruptcy. They can also usually be liquidated ahead of the preferred's call date given certain regulatory events. This can make it impossible to calculate a reliable yield to worst for a Capital trust preferred.

- Joel
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