Thursday, September 10, 2009
What does this mean?
What does it mean when a company issues the statement (I'm paraphrasing) "to issue common shares in exchange for existing preferred shares" and what effect does that have on the preferred shares?
Search This Blog
Learn More Preferred Stock Investing At...
|
|||
|
|
 |
Preferred Stock Marketplace Snapshot
Today's Preferred Stock Headlines
Preferred Stock Investor Resources & Tools
Surveys, Questions - Test Your Knowledge
- 02/12: How do I pick the highest quality preferred stocks?
- 01/12: What is the lowest dividend rate to buy that still has some price protection?
- 12/11: What is the difference between a 'cumulative' and 'non-cumulative' dividend?
- 11/11: When Does The 'Call Date' Occur?
- 10/11: How Much Do I Receive When A Preferred Stock Is Called?
- 08/11: How do I avoid buying a preferred stock that I can never sell?
- 09/11: How Do I Calculate The Effective Annual Return?
- 07/11: What are the three types of preferred stocks?
- 06/11: What is a 'capital treatment event?'
- 05/11: What is a trust preferred stock?
- 04/11: What is a preferred stock's 'liquidation preference?'
- 03/11: How do I tell if there is strong demand for a preferred stock?
- 02/11: What price is used to calculate preferred stock dividends?
- 01/11: Why are preferred stocks considered lower risk than the same company's common stock?
- 12/10: What preferred-issuing industries tend to benefit from inflation?
- Preferred Stock Frequently Asked Questions
- Review The Book!
- Review This Blog!
3 - Click To Post Comments:
Hello Don-
Thanks for your post.
Until earlier this year we only saw this phrase in the prospectus of “convertible” preferred stocks. Some preferred stocks are, at a certain future point in time or under certain conditions and at a certain conversion ratio, convertible to the issuing company’s common stock. This can represent a good opportunity for investors if the value of the company’s common stock increases after you purchase such convertible preferred stock shares since you may be converting to common shares that have more value than your preferred shares.
But the reverse outcome is equally possible – you could find your preferred stock shares converted to common shares of lower value. Because of this risk, the CDx3 Selection Criteria exclude convertible preferred stocks.
Earlier this year federal banking regulators decided that banks needed to increase what is called Tier 1 Common Equity. Historically, these regulators have focused more on another metric of bank health called Tier 1 Capital. When calculating Tier 1 Capital (the old metric) accountants include the value of both the bank’s outstanding shares of common stock and its preferred stock; but when calculating the newly emphasized metric, Tier 1 Common Equity, preferred stock is not included in the math.
Consequently, over the last several months, we have seen a number of banks ask their preferred stock investors holding non-convertible preferred stock shares to volunteer to convert their preferred stock shares over to the bank’s common stock shares. The phrase you are asking about (“to issue common shares in exchange for existing preferred shares”) has been seen in connection to these voluntary conversion efforts on the part of these banks so that they can comply with the new Tier 1 Common Equity regulatory requirements.
Thanks again for your post Don.
Many Happy Returns.
That's what I thought, a voluntary convertion. If the price of a preferred plunges on that announcement is it just an unreasonable emotional response probably?
Maybe or maybe not. The reaction from the market would depend on the nature of the conversion being announced (conversion ratio, timeline, pricing, etc.).
Also, short sellers interested in a short-term opportunity can dramatically affect the market prices of the company's common and preferred stocks during such a conversion as well.
I suggest that you read through the particulars of the announcements and see how it may affect you and your investemnts.
Many Happy Returns.
Post a Comment