Why Stocks Go Up and Down by Pike WIlliam & Gregory Patrick

Author:Pike, WIlliam & Gregory, Patrick [Pike, WIlliam]
Language: eng
Format: mobi, epub
Tags: Business, Finance
Publisher: Bill Pike Books
Published: 2013-11-04T16:00:00+00:00

Trust Preferred Securities on the Balance Sheet

Most companies issuing TPS show only the underlying Junior Subordinated Debentures on the parent’s balance sheet. The 8% Trust Preferred Security, which properly belongs on the financing subsidiary’s balance sheet, may not show anywhere, or will most likely appear only in the parent’s balance sheet footnotes. If the parent company’s balance sheet showed both the junior sub. debs. and the TPS, it would be double counting the obligation.

While showing the jr. sub. debs. on the parent balance sheet is most common, some TPS issues show on their parent’s balance sheet with a title, such as “Preferred Securities in Subsidiary Trusts,” or “Guaranteed beneficial Interests in Corporation Junior Subordinated Deferrable Interest Debentures” or “Junior Subordinated Deferrable Interest debentures Held In Trusts”. Many other variations or similar words also show up, both on the balance sheet and in footnotes.

If the company chooses to show the jr. sub. deb., it will most likely appear as part of Long Term Debt on the balance sheet. If the company shows the TPS with one of the longer titles, such as those shown above, it may show them: 1) as a sub-category under preferred stock, 2) include it in “Other Long-Term Liabilities,” or 3) create a separate line that is above preferred stock and below long term debt. That in-between location is sometimes referred to as the mezzanine.

On Wall Street, the term mezzanine financing refers to raising money by selling securities that come somewhere between senior debt and equity. Convertible bonds and convertible preferreds are usually thought of as mezzanine financing. Trust preferred securities are always thought of as mezzanine financing. But non-convertible preferred stock and subordinated debentures other than junior subordinated debentures may or may not be considered mezzanine.

Regardless of what it is called, TPS should be treated as part of the company’s total capitalization when calculating the debt-to-total capitalization ratio. Most investors would also treat it as debt in the numerator of that ratio, but, as discussed above, because these securities have some equity characteristics, some investors might treat it as equity.

The capitalization table below shows, in italics, four places where the TPS might appear on a balance sheet. Note that “Other Long Term Liabilities” shows a larger number than the other TPS titles. This is because Other Long Term Liabilities would likely contain some items in addition to the TPS.

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