Preferred Stocks

• Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than voting shares, (ordinary shares)and its terms are negotiated between the corporation and the investor.

• It is also called quasi equity because it has features of both bond and equity.

• Preferred stocks usually carry no voting rights, but may carry superior priority over common stock in the payment of dividends and upon liquidation. Preferred stock may carry a dividend that is paid out prior to any dividends to common stock holders. Preferred stock may have a convertibility feature into common stock.

Preferred Stocks……..Certificate of Designation

• Preferred stockholders will be paid out in assets before common stockholders and after debt holders in bankruptcy. Terms of the preferred stock are stated in a "Certificate of Designation".

The terms can be for example:

Not to issue another series for example in the coming 2 years

Inform PSH of any significant event

Take into confidence if debt need to be increased beyond an indicted level

To redeem part of the preference shareholders by amount or by series

Put and call option

Preferred stock……..rights…….

Preferred stock usually has several rights attached to it:• The core right is that of preference in the payment of dividends and upon

liquidation of the company. Before a dividend can be declared on the common shares, any dividend obligation to the preferred shares must be satisfied.

• The dividend rights are often cumulative, such that if the dividend is not paid it accumulates from year to year.

• PS has no specified maturity but are often callable that is why people go for preferred stock.

• Preferred stock may or may not have a fixed liquidation value, or par value, associated with it. This represents the amount of capital that was contributed to the corporation when the shares were first issued.

• Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value unless otherwise negotiated. This claim is senior to that of common stock, which has only a residual claim.

Preferred Shares….fixed dividend• Almost all preferred shares have a negotiated fixed dividend amount. The

dividend is usually specified as a percentage of the par value or as a fixed amount.

• Sometimes, dividends on preferred shares may be negotiated as floating i.e. may change according to a benchmark interest rate index such as LIBOR.

• A) shares can be PS or CS, although CS are below PS but if CS are more, then after paying dividend liquidity would be lesser for next year.

• Some preferred shares have special voting rights to approve certain extraordinary events (a such as the issuance of new shares or the approval of the acquisition of the company) or to elect directors, but most preferred shares provide no voting rights associated with them. Some preferred shares only gain voting rights when the preferred dividends are in arrears for a substantial time.

• Usually preferred shares contain protective provisions which prevent the issuance of new preferred shares with a senior claim. Individual series of preferred shares may have a senior, pari-passu or junior relationship with other series issued by the same corporation

Benefits of Conversion Option in Stocks

• Advantage of it to company is there all debt will be converted to equity and in this way their debt to equity ratio will also improve. May be company want to go for other debt and due to their improved debt to equity ratio, it may be get loan on cheaper rate.

• Advantages for subscriber are dividends, discount and also they will be expecting that market will go up for stocks.

Preferred Shares….Classes & Tax advantage

• A single company may issue several classes of preferred stock. For example, a company may undergo several rounds of financing, with each round receiving separate rights and having a separate class of preferred stock; such a company might have "Series A Preferred", "Series B Preferred", "Series C Preferred" and common stock.

• In the United States there are two types of preferred stocks: straight preferreds and convertible preferreds. Straight preferreds are issued in perpetuity (although some are subject to call by the issuer under certain conditions) and pay the stipulated rate of interest to the holder.

• There are income tax advantages generally available to corporations that invest in preferred stocks in the United States that are not available to individuals

Preferred Shares….Tier I and equity rating

• One big advantage that the preferred provides its issuer is that the preferred gets better equity credit at rating agencies than straight debt, since it is usually perpetual. Also, as pointed out above, certain types of preferred stock qualifies as Tier 1 capital. This allows financial institutions to satisfy regulatory requirements without diluting common shareholders. Said another way, through preferred stock, financial institutions are able to put on leverage while getting Tier 1 equity credit.

• Suppose that an investor paid par ($100) today for a typical straight preferred. Such an investment would give a current yield of just over 6%. Now suppose that in a few years 10-year Treasuries were to yield 13+% to maturity, as they did in 1981; these preferred would yield at least 13%, which would knock their market price down to $46, for a 54% loss. (In all probability, they would yield some 2% more than the Treasuries--or something like 15%, which would take the market price down to $40, for a 60% loss.)

Standard Chartered Plans $3 Billion Rights Offer

Purpose of Issue: Raise 1.8 billion pounds ($2.7 billion) in a rights offer to bolster its finances as the global economic recession deepens. Rrights issue is aimed at boosting the emerging markets bank’s capital reserves and easing investors’ concerns about its ability to weather a severe economic downturn.A rights offer is a better arrangement to strengthen their capital ahead of a potential slowdown. There's a dilutive effect, but in the long run it puts the bank in a better position.‘

• Chief Executive Officer said the capital- raising will provide a ``buffer in an increasingly volatile environment'' as the bank tries to shore up defenses against the financial crisis

• Right Offer: Offering existing shareholders 30 new shares for 91 already held at 390 pence apiece, or a 49 percent discount to the last closing price,

• Standard Chartered declined 2.9 percent as of 8:03 a.m. in London trading. The stock has dropped 60 percent this year, the second-best performer in the six-member FTSE 350 Banks Index, which is down 59 percent.

Standard Chartered Plans $3 Billion Rights Offer

• Right take-up” The bank said Singapore state investment company Temasek, its biggest shareholder with an 18.99 per cent stake, planned to take up its rights and was also participating in the underwriting of the issue, alongside JPMorgan, UBS and Goldman Sachs.

• StanChart’s move will also provide a test of the willingness of UK institutional investors to support capital raising by large financial institutions.

• Approval: StanChart already has the authority to issue up to a third of its share capital without seeking approval from shareholders.

• StanChart’s rights issue gives all its existing shareholders the opportunity to take part in the offering. This is a stark contrast with the recent move by Barclays, a rival UK lender, which turned to investors in the Middle East for the majority of its £7bn capital increase, denying existing shareholders the chance to participate.

Preferred Stocks • Common types• There are various types of preferred stocks that are common to many corporations:• Cumulative preferred stock - If the dividend is not paid, it will accumulate for future

payment.• Non-cumulative preferred stock - Dividend for this type of preferred stock will not

accumulate if it is unpaid. Very common in TRuPS and bank preferred stock, since under BIS rules, preferred stock must be non-cumulative if it is to be included in Tier 1 capital.

• Convertible preferred stock - This type of preferred stock carries the option to convert into a common stock at a prescribed price.

• Exchangeable preferred stock - This type of preferred stock carries the option to be exchanged for some other security upon certain conditions.

• Monthly income preferred stock - A combination of preferred stock and subordinated debt. • Participating preferred stock - This type of preferred stock allows the possibility of

additional dividend above the stated amount under certain conditions. • Perpetual preferred stock - This type of preferred stock has no fixed date on which invested

capital will be returned to the shareholder, although there will always be redemption privileges held by the corporation. Most preferred stock is issued without a set redemption date.

• Putable preferred stock - These issues have a "put" privilege whereby the holder may, upon certain conditions, force the issuer to redeem shares

Corporate Bond• Common types• There are various types of preferred stocks that are common to many corporations:• Cumulative preferred stock - If the dividend is not paid, it will accumulate for future

payment.• Non-cumulative preferred stock - Dividend for this type of preferred stock will not

accumulate if it is unpaid. Very common in TRuPS and bank preferred stock, since under BIS rules, preferred stock must be non-cumulative if it is to be included in Tier 1 capital.

• Convertible preferred stock - This type of preferred stock carries the option to convert into a common stock at a prescribed price.

• Exchangeable preferred stock - This type of preferred stock carries the option to be exchanged for some other security upon certain conditions.

• Monthly income preferred stock - A combination of preferred stock and subordinated debt.

• Participating preferred stock - This type of preferred stock allows the possibility of additional dividend above the stated amount under certain conditions.

• Perpetual preferred stock - This type of preferred stock has no fixed date on which invested capital will be returned to the shareholder, although there will always be redemption privileges held by the corporation. Most preferred stock is issued without a set redemption date.

• Putable preferred stock - These issues have a "put" privilege whereby the holder may, upon certain conditions, force the issuer to redeem shares

Corporate Bond• A Corporate Bond is a bond issued by a corporation. The term is usually

applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.)

• Sometimes, the term "corporate bonds" is used to include all bonds except those issued by governments in their own currencies. Strictly speaking, however, it only applies to those issued by corporations. The bonds of local authorities and supranational organizations do not fit in either category.

• Corporate bonds are often listed on major exchanges (bonds there are called "listed" bonds) Sometimes this coupon can be zero with a high redemption value. However, despite being listed on exchanges, the vast majority of trading volume in corporate bonds in most developed markets takes place in decentralized, dealer-based, over-the-counter markets.

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Call and Conversion optionSecured and Un-SecuredSenior vs Subordinate

• Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible bonds, allow investors to convert the bond into equity.

• Corporate debt falls into several broad categories:• secured debt vs unsecured debt • senior debt vs subordinated debt

• Generally, the higher one's position in the company's capital structure, the stronger one's claims to the company's assets in the event of a default.

Risk analysis• Compared to government bonds, corporate bonds generally have a higher risk of default. • This risk depends, of course, upon the particular corporation issuing the bond, the current

market conditions and governments to which the bond issuer is being compared and the rating of the company. Corporate bond holders are compensated for this risk by receiving a higher yield than government bonds.

Dividends

• The word "dividend" comes from the Latin word "dividendum" ("thing to be divided)

• Dividends are payments made by a corporation to its shareholder members.

It is the portion of corporate profits paid out to stockholders.[1]

• When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends.[

• Many corporations retain a portion of their earnings and pay the remainder as a dividend.

Dividends• A dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in

proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company's balance sheet - the same as its issued share capital. so their dividends are often considered to be a pre-tax expense.

• Dividends are usually paid in the form of cash, and shares in the company (either newly created shares or existing shares bought in the market.)

• Further, many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder.

• Dividend-reinvestment• Some companies have dividend reinvestment plans, or DRIPs, not to be confused with scrips. DRIPs

allow shareholders to use dividends to systematically buy small amounts of stock, usually with no commission and sometimes at a slight discount. In some cases, the shareholder might not need to pay taxes on these re-invested dividends, but in most cases they do.