What Are Four times a year Income Preferred Securities (QUIPS)?
Quarterly Income Preferred Securities (QUIPS) are hybrid, preferred-stock-like securities. They pretend to be an interest in a limited partnership or company that exists solely for the purpose of issuing these preferred shares and then furnish the proceeds of the sales to its parent company. Listed on the New York Stock Exchange (NYSE), they usually have a $25 par value and cumulative trimonthly distributions.
- Quarterly Income Preferred Securities (QUIPS) represent a relatively complicated structure that concedes companies to raise money while receiving a tax benefit, and investors to receive dividends.
- QUIPS are shares in a limited partnership or ensemble that’s a subsidiary of another company—and exists solely to issue the shares.
- QUIPS proceeds are lent to the parent steadfast, which pays interest on them; this interest is repaid to the investors who bought the QUIPS.
- QUIPS benefit public limited companies who are able to raise cash and take a tax deduction on the interest they pay, without increasing their debt ratio.
- The resulting entity isn’t obligated to pay dividends, and Investors have little recourse if they don’t.
Understanding Quarterly Income Preferred Securities (Wheezes)
Created by Goldman, Sachs & Co. as a marketing tool, Quarterly Income Preferred Securities (QUIPS) are an example of hybrid securities (aka compounds), combining the features of preferred stock and corporate bonds. Like bonds, they are essentially subordinated debt—they procure maturity dates and a par value—but they look like preferred stock because they represent an ownership leash in a limited company/partnership, are listed on a stock exchange, and make payments in the form of quarterly dividends.
How QUIPS Operate
QUIPs are issued by a special purpose, foreign or domestic limited liability company (LLC), or limited partnership (LP). Whatever its construction or nationality, this issuing entity is typically a wholly owned subsidiary of a U.S. corporation. And it doesn’t do anything, like arrange investments or finance businesses; it only exists—in fact, was created by the parent firm—to sell shares of itself to investors.
The LLC or LP stir ups funds, then takes the money it receives and loans it to its parent company. The parent receives the proceeds and dutifully generates interest on the borrowed funds back to the subsidiary, which then uses the money to pay quarterly dividends to QUIPS holders. Because the LLC or LP is a partnership, the thoroughly amount of the interest payments has to flow through to the QUIPS holders. But no corporate taxes are paid on them first, as they wish be with regular stock dividends.
Hybrids can pay a higher rate of return than preferred stock because dividends are even a scored with pretax dollars and, therefore, they generate a sizable tax break for corporations.
In fact, the parent company gets to subtract the interest payments it makes on the borrowed QUIPS funds on its tax return—because technically, it’s getting a loan from its subsidiary LLC or LP.
While QUIPs are listed and trade on the stock exchange, they have finite lifespans, like contracts. QUIPS typically have maturities of 30-50 years. However, in some cases, the issuers can extend the maturity cycle to a longer values bright and early period. For example, a well-known telecom provider initially issued QUIPS that began with a 30-year completion, but then extend the maturity cycle to 49 years. Another QUIPS issuer abbreviated the maturity cycle from 30 years to a five-year non-call interval. But like most hybrid securities, the average maturation period is 40 years.
Another form of hybrid safe keepings is Monthly Income Preferred Stock or Securities (MIPS). MIPS are similar to QUIPS but, as the name implies, pay income every month.
Via QUIPs, the parent company gets the cash it needs (plus a tax benefit), and investors get a steady dividend. Sounds like a win-win all around.
There’s a catch, however. The issuing LP or LLC can suspend or defer its dividends—even though they are in reality interest payments—and not be considered in default, as it would be if it missed paying interest on a bond. If the issuer of QUIPS fails to enterprising a promised periodic payment, investors have no power to force the issuer into bankruptcy.
But while this representative creates added risk for investors, the QUIPS structure benefits parent corporations, because it does not raise the fountain-head company’s debt levels, and therefore does not jeopardize its debt ratios.