Quarterly Income Preferred Securities - QUIPS

  

Categories: Stocks

Those funny little things people say in movies that always seem so charming, but when you try it in real life, people just look at you awkwardly for a second and then change the subject.

Wait...different kind of quip. These QUIPS relate to a particular kind of tradable security. They represent a relatively complicated structure that allows companies to raise money, while receiving a tax benefit.

Here's how it works: a company needs to raise some cash. Rather than selling stock or issuing debt (or just getting a loan), it sets up a special purpose LLC. The sole purpose of this limited partnership is to issue QUIPS, which get sold on an exchange like preferred stock.

The QUIPS are used to raise funds. The money raised by selling the securities then gets loaned to the parent corporation. The parent company then uses the cash...paying the money back (like a regular loan) to the specially-created LLC that issued the QUIPS. These loan payments fund quarterly dividends, paid to the people holding the QUIPS.

The parent company gets the cash it needs, and investors get a steady dividend. Meanwhile, the corporation also gets to deduct the interest payments it makes related to the QUIPS from its taxes.

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Finance: What is an Accumulated Dividend...9 Views

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finance a la shmoop what is an accumulated dividend okay you know what

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a dividend is companies generally commit to paying it when they have so much [Example of dividend meaning on a 100 dollar bill]

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extra cash profit that they really don't know what to do with the dough yeah nice

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place to be in the case of a preferred stock the dividends aren't just a

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optional-ish they operate more like bond interest only with a catch

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that is dividends on preferred stock can in fact be halted without the company

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being repossessed by the debt holders like in the case where the company falls [Prize wheel lands on hard times]

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on hard times or it wants to preserve its cash to buy a competitor or it just

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wants another jet with a water slide thing on it well yeah it can halt its [Person slides down a jet slide]

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dividend in those cases and well there are two types of preferred stock in this

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realm the ones that pay cumulative dividends and the ones that don't

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cleverly named non-cumulative say a company has halted dividends from its

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preferred for three and a half years and it was paying five bucks a quarter in [Dividend distribution graph]

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dividends from those cumulative preferred well if it was to resume

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paying dividends on them it would first have to pay all back fourteen quarters

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worth of dividends before it began to issue more dividends or pay them to its

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preferred holders that is it owed three years times four quarters or twelve

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quarters plus half a year or two quarters for a total of fourteen

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quarters at five bucks a quarter a share that's five times fourteen or seventy [Formula of non-cumulative dividends]

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dollars a share in back cumulative dividends big obligation but it has to

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pay that amount before it can resume dividend payments why would a company

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have a cumulative feature in its preferred dividend obligation well

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because investors forced it to do so or they wouldn't invest they were worried [Person swipes away stacks of money]

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that the preferred dividends might be just some merrily stopped and then the

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investors would have little or no return on their investment in the preferred and

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this can be a problem for companies that have fallen on hard times they are

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essentially made illiquid in that they can't afford to pay the back dividends [Example of illiquid meaning]

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on the preferreds and they can't raise more capital with this blight on their

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record of having stopped paying a divvy well most [Non cumulative stock stickers appear on a table]

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furred stocks are non-cumulative and if companies decide to just stop paying

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them they can but if they do it's kind of like they've reneged on a handshake [Two guys giving a handshake]

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and you know investors talk so like good luck to the company ever trying to raise

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capital again from the cold cruel outside world yeah welcome to Wall

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