hybrid preferred stock issued by special-purpose entities (SPE) organized as corporate subsidiaries, limited partnerships, or trusts, with the proceeds loaned to the parent company. The parent company books the proceeds as deeply subordinated debt on which it pays tax-deductible interest to the SPE, which pays preferred dividends to the buyers of the securities. Because the parent company, with debt repackaged as equity, gets the best of both worlds, some 70% of all new preferred issues are now income preferred securities, whose yield to investors is normally higher than the prevailing yield on conventional preferred issues. (Corporate investors are not allowed the 70% dividend exclusion, so the investors are largely individuals.) Since the issuer has the option of temporarily deferring dividend payments, the investor may have a tax liability on income allocated but not yet received.
Hybrids of hybrids now include Monthly Income Debt Securities (MIDS), which are subordinated debentures with 30-50-year maturities, issued directly by the parent company, which guarantees monthly payments; the quarterly version of MIDS, called QUIDS; Trust Originated Preferred Securities (TOPrS), which make quarterly payments guaranteed by the parent company, although they are direct obligations of the trust; and Quarterly Income Capital Securities (QUICS), which are similar to QUIDS. Related, are Exchangeable Notes, which, after an initial period and at the company's option, can be exchanged or converted into the issuer's preferred stock.
