Preferred shareholders are the senior equity holders in a company and
have "preference" in terms of dividend payments and distributions in
the case of bankruptcy. Beyond this, preferred shares come in many varieties.
The payment terms and structure of preferred shares are very flexible and lead
to the many different types of preferred shares available in the financial
markets.
Term
A good starting place for considering the types of preferred shares is to look at the term or
time period provided for in their structures. A "perpetual preferred
share" has no fixed maturity date. It pays its stated dividend
forever or "in perpetuity". A "retractable" or "term"
preferred share has a set maturity at issue. A five year retractable preferred
would have a $25 "par value" which would be repayable by the issuer
five years from the date of issue.
Payment Provisions
Most preferred shares provide for a set or "fixed-rate" dividend
upon issue, usually declared and paid quarterly. This can either be set as a
fixed dollar value dividend or a stated percent of the par value. For example,
a $25 par preferred share might set a $1.25 annual dividend or provide for a 5%
of par payment which would also be $1.25 (5%x$25). Preferred shares can also
provide for a variable dividend stream. "Floating-rate" preferred
shares provide for a dividend that is paid by reference to a market interest
rate. For example, a common Canadian structure is to use a percentage of the
commercial bank prime rate. If the preferred provisions say 80% of the prime
rate payable monthly, the prime rate divided by twelve would be taken each month
and multiplied against the par amount and 80% of the result would be paid out to
the preferred shareholder.
Preferred share dividends are made at the discretion of management. The
provisions for a preferred share usually provide for "cumulative"
dividends. This means that the dividends that are missed are accumulated and
must be paid out at a later date. The structure of preferred shares means that
common share dividends cannot be paid if the preferred share dividend has been
missed. |