Preferred Equity Redemption Stock - Explained
What is Preferred Equity Redemption Stock?
Written by Jason Gordon
Updated at April 16th, 2022
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Table of Contents
What is Preferred Equity Redemption Stock?What are the Characteristics of Preferred Equity Redemption Stock (PERC)?Synthetic PERCSAcademic Research on Preferred Equity Redemption Stock - PERCWhat is Preferred Equity Redemption Stock?
The Preferred Equity Redemption Stock (PERC) is a type of security that must be converted at maturity. It can be converted to a regular common stock if certain conditions are met. PERCs can also undergo an early redemption at a premium bu the issuing company. The preferred stock features different provisions like it converts automatically into equity at a stated date and likewise, a limit is placed on the value of the shares the investor receives.
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What are the Characteristics of Preferred Equity Redemption Stock (PERC)?
Morgan Stanley introduced the preferred Equity Redemption Stocks in the early 1990s. PERCs agreement includes terms involving mandatory conversions to preferred stocks. In terms of profit, it is more profitable than common stocks. Usually, they mature between three to five years after the date of the issue but also possible to redeem early at the premium. They are converted to cash or shares when they mature. PERC is also known to be at a higher price than the cap price. Also, PERC is considered to be equity derivative instruments. Their return characteristics can be shared among other derivative securities.
This is called bifurcated securities. Preferred Equity Redemption Stocks shareholders are given the following:
- A single share of common stock for each share of preferred stock they hold. This is only available to the shareholder whose existing common stock share price is lower than the price cap.
- On the other hand, One share of common stock that is equal in value to the price cap for each share of preferred stock held is given when the shareholder holds an existing common stock share price that is higher than the price cap.
Synthetic PERCS
A synthetic PERCs only involves the company responsible for the stocks in terms of stock value payment. It does not occur as equity of the company to whose shares it's connected with rather, it is a responsibility for the originating company. It is security fashioned in a way to reproduce its outlined mandatory conversions to preferred stocks. The payment here is taxable as interest, unlike dividends. Like others, the buy-write security is also applicable in synthetic PERCs.
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