What is a Trust-Preferred Security?
Trust-preferred securities are investments that possess debt and equity attributes. The unique combination of debt and preferred stock is generally considered to be a viable long-term investment, although a trust-preferred security does allow for early redemption by the issuer of the security. Many examples of an investment of this type will also carry the ability to defer interest payments for up to five years after the initial date of issue. In order to issue a trust-preferred security, a corporation will usually establish a trust to function as the entity that issues the security. The funding is provided by the corporation and is counted as a debt for the new trust. This formula creates a bank holding company, and is subject to the same regulations that govern the establishment of any holding company. The bank holding company will hold all issued shares of the common stock connected with the security arrangement. Using the common stock as an underlying asset, the holding company iss
If you are looking for a financial balance with your long-term investment strategy, a trust-preferred security may have it. This type of investment consists of both equity and debt issues. Bank holding companies typically issue a trust-preferred security by creating trust and issuing debt to the new entity. Corporations will usually create a trust to issue securities. The creating corporation provides the money for the security which is considered debt. By doing so, a bank holding company is established. It then is subject to the same rules that apply to any holding company and a trust-preferred security is formed. Trust-preferred securities offer their investors favorable tax, accounting, and credit treatment and since they are typically issued by a bank holding company, they are treated as capital (equity/own funds) rather than as debt for regulatory purposes – thus resulting in major tax benefits. Dividends for trust preferred securities could be paid quarterly or semi-annually to t
