Retractable Preferred Shares

Retractable Preferred Shares are the preferred shares that the holder can sell back to the issuer at a predefined price at the maturity date. It is a type of share which has a maturity date, it allows the issuer to enforce the redemption. The issuer can redeem the share by paying cash or convert it to a common share. The holders do not have a choice but to follow the issuer decision. Even the investors do not want to sell the share, the issuers can force them to do so.

Example

Company ABC issues the retractable preferred share to raise cash. They issue 100,000 shares at $ 100 per share. The share will be mature at 5 years with a dividend $ 5 per share per year. The company will force the preferred shareholder to redeem the share at par value ($ 100).  Please calculate the amount of cash that the issuer needs to pay back to the shareholder.

Redeemable Amount = Par Value + Dividend

= $ 100 + ( 5 years * $ 5 per year) = $ 125

The company issue this type of share in order to raise cash and prevent any change in equity structure. It will not impact the share voting right. The company can prepare cash to settle at the maturity date and annual dividend.

Features of Retractable Preferred Share

• Maturity Date: It has the maturity date which needs to redeem to cash or convert to common stock.
• Predictable Dividend: The holder will receive the stable dividend paid base on the term of share.
• Issuer can redeem cash or common Stock: Besides cash, the issuer can convert the share to common stock which is depend on issuer’s decision.
• Stable market price: Due to the fixed redeemable amount, the market price will not change much besides the interest earns.

Benefits

• The company may set the build-in call premium in order to attract the investors, so the investors can enjoy the surplus.
• The investors will not sufer from decreasing in share price when company does not perform well. They can enjoy stable dividend and pre-defined redeemable amount.
• It helps the company to raise cash without diluting the current common shareholder.

Disadvantages

• It may be a drawback for the investors when the redeemable amount is lower than the market price. So the issuer usually includes the premium on the retirement amount in order to attract the investors.
• The investors do not have an option to reject the redemption. They need to follow the issuer’s order.

Redeemable Vs Retractable Preferred Shares

The redeemable stock is the type of stock that allows the issuer to buy back after a specific time frame. The price of the stock will depend on the agreement set on the issued date. It also called “callable preferred share”. Redeemable stock does not have a maturity date, so the issuer needs to notice the shareholders regarding the buyback.

The redeemable preferred stock allows the issuer to recall at a specific price and retire it. When the interest rate in the market drop, the issuer is highly likely to buy back the high rate redeemable stock and find a cheaper source of capital.