Redemption of a Called Security

[marko]

I was doing a year-end check-up on my brother's investments and noted that he was missing one of his holdings.

Further inspection showed a cash settlement last week from that holding to him and "redemption of a called security". I believe this might have been a preferred stock.

From what I've gathered, the issuer decided to pull back the security and paid him outright at market value? Just wondering why they might do that and if this was to my brother's advantage.

Anyone care to educate me on how/why this works? I'm a straight MF guy and this is all new to me.

 

[meierlde]

I was doing a year-end check-up on my brother's investments and noted that he was missing one of his holdings.

Further inspection showed a cash settlement last week from that holding to him and "redemption of a called security". I believe this might have been a preferred stock.

From what I've gathered, the issuer decided to pull back the security and paid him outright at market value? Just wondering why they might do that and if this was to my brother's advantage.

Anyone care to educate me on how/why this works? I'm a straight MF guy and this is all new to me.

Given that preferred shares look more like debt instruments in that they pay a fixed dividend, what happened is that the company decided that in todays low interest environment they could get the principal for a lower cost. Basically it is the equivalent of refinancing a house, to get a lower cost loan.

 

[marko]

Given that preferred shares look more like debt instruments in that they pay a fixed dividend, what happened is that the company decided that in todays low interest environment they could get the principal for a lower cost. Basically it is the equivalent of refinancing a house, to get a lower cost loan.

Ah! Thank you!

 

[BrianB]

What Meieride said, and I would add:

Preferred stock redemptions are not at market price. They are at the redemption price. Most commonly the redemption price is $25 or $50 but some are issued with a different value.

Most redemptions are for cash but in some cases the preferred share is redeemed by converting it to common shares at a predetermined rate.

Just a couple of the quirks of preferred shares.

BrianB

 

[Agapostemon]

From what I've gathered, the issuer decided to pull back the security and paid him outright at market value? Just wondering why they might do that and if this was to my brother's advantage.

If your brother was relying on that security as part of his income stream, having it called before maturity is not to his advantage. If you want to replace with something that has a similar yield, you are going to have a difficult search.

 

[Mulligan]

If your brother was relying on that security as part of his income stream, having it called before maturity is not to his advantage. If you want to replace with something that has a similar yield, you are going to have a difficult search.

It all depends on what was bought and price entry point. And typically if something had an above market yield it was priced well over par, dragging effective yield down on worth. And then a resulting call loss smack down occurred with the redemption.
But, I am one of those mark to market guys. If I bought a preferred at $24 and it went to $27 and was redeemed at $25, I dont consider that a $1 taxable gain, but instead an 8% loss of capital.

 

[jazz4cash]

What Meieride said, and I would add:

Preferred stock redemptions are not at market price. They are at the redemption price. Most commonly the redemption price is $25 or $50 but some are issued with a different value.

Most redemptions are for cash but in some cases the preferred share is redeemed by converting it to common shares at a predetermined rate.

Just a couple of the quirks of preferred shares.

BrianB

Is the redemption price the same as par for a preferred stock? Or does it depend on the terms of the issue?

 

[Mulligan]

Is the redemption price the same as par for a preferred stock? Or does it depend on the terms of the issue?

Technically there are four terms to a preferred. 1) Its IPO price 2) Liquidation price 3) Par value 4) Redemption value. All four of the above can actually have different monetary values assigned to a singular preferred. So yes, you are correct it depends on the terms of preferred which is written in its “prospectus”.
Although lazily referred to as “par” IPO price and redemption price really have nothing to do with par. Par in those terms is actually a bond reference. Par to a preferred stock is an accounting term for balance sheet. Most preferreds issued today have a par value of $0.01 or $0.00.

 

[marko]

If your brother was relying on that security as part of his income stream, having it called before maturity is not to his advantage. If you want to replace with something that has a similar yield, you are going to have a difficult search.

Good point but not a problem for him. It was under $50K in total value and part of a recent inherited IRA. He doesn't need the money and as his guardian/conservator I had been putting off what to do with that whole part of his portfolio. He has a ton of Apple and ATT so I might just add to that; small potatoes in his case.