Convertible Exchangeable Preferred Stock

Definition

The term convertible exchangeable preferred stock refers to a security that allows the issuer to exchange it for convertible bonds.  Empirical evidence suggests issuing convertible exchangeable preferred stock is oftentimes accompanied by a negative earnings outlook.

Explanation

Convertible exchangeable preferred stock allows the issuing company to exchange a non-taxable expense (the preferred dividend) for a taxable expense (the interest expense on bonds).  These securities combine two features, one that benefits the issuer and one that benefits the holder:

  • Exchangeability:  at the issuer's discretion, the preferred stock may be exchanged for convertible bonds at a predetermined rate.
  • Convertibility:  at the holder's discretion, the bonds can be converted at a predetermined rate for common stock.

While these securities should be more popular with investors and issuers than preferred stock carrying only one of the above features, their popularity in the market lags behind both exchangeable preferred and convertible preferred.

Related Terms

auction rate preferred stock, participating convertible preferred stock, convertible adjustable preferred stock, preferred equity redemption stock