18. While skipping preferred dividends does not result in default, it does tend to severely depress the stock price. Restrictions on common dividend payments, board seats to preferred shareholders and other remedies may be imposed on the firm until the arrears in preferred dividends are paid. Consequently, the option to skip preferred dividends, although embedded in the structure, is resorted to only when the firm is in financial distress.

19. Issuance of traditional preferred shares, in most cases, is viewed as helping prevent a ratings downgrade but not necessarily help in a ratings upgrade. Since mandatorily convertible securities, by structure, are certain to convert into common shares within three years and at most in five years, they are viewed more akin to common shares, and therefore may be accorded up to 85% equity credit. This applies to all flavors of mandatorily convertible securities—preferred, exchangeable debt, or hybrid tax deductible preferred.

20. When the 30-year Treasury bond was the longest dated liquid benchmark, preferred were priced off of its yield to maturity. However, since 2001 when the Treasury halted regular issuance of the 30-year bonds—although it has been brought back with limited frequency and liquidity since 2006—the 10-year U.S. tenor is the most liquid long-dated U.S. Treasury security, converts are priced off of this benchmark. The CDSs are also typically 5-year tenor and occasionally longer.

21. This logic applies to all converts.

22. A variation of this security allows the issuer the option to exchange the convertible preferred for an otherwise identical convertible subordinated debenture of maturity 10 years from the original date of issue. Issuer will usually exercise this option when it returns to tax-paying status.