6/22/2022 - Economy and Finance

Preferred actions: is it an action, a bonus or what it is?

By Gustavo Neffa

Preferred actions: is it an action, a bonus or what it is?

If you have four legs, move your tail and bark is... You don't have to write the answer. But often In the world of finances are evident, but they are called in a different way or issued in a way, but in fact it is a totally different asset for an investor.When we send an order to buy an action, we are used to buying and selling ordinary shares. In their defect are ordinary and the one that are the most common and the ones that are most emitted. But There are other types of actions that investors can buy in the same way that ordinary actions, and are the preferred actions, which have very different characteristics, Although they are bought in the same purse and quoted daily in the likeness of an ordinary action.Preferred actions are a hybrid instrument, i.e., is the mix between an action and a very distant maturity bonus (or “perpetuo” bonus, which as much as is due, is usually called because it is issued within 30 years). It is because although they are issued as actions, in practice they pay a fixed dividend (as if it were a coupon) which is usually done in quarterly form, among other distinctive features.Like a corporate bonus, it has a fixed coupon and a deadline, and unlike them have a lower recovery priority in case of financial insolvency and is part of the “permanent” capital of a company, which for regulators is very important. Hence most of them are preferred actions of financial entities. Alternatives in productive sectors or other types of services also operate, but are the least.Preferred actions share some basic characteristics with business obligations, but instead of 100 for common obligations have a nominal value of 25. In addition, they are all issued with a very long time, as perpetual obligations, unlike traditional obligations.Among the similarities between a preferred action and a bonus, the contract must specify the characteristics and conditions of issue: the deadline, the form of amortization, the income to be paid, the restrictions or Covenants, among others.In the calculation of income, there are preferred shares at the fixed rate (the interest rate is fixed in advance and is usually paid quarterly (for bonds is typically biannual in most emissions), or may be the floating rate.The important thing when deciding to position yourself in a preferred action is to know what risk is going. There are risk qualifiers who do (or should do) the work for us, giving you more transparency and objectivity to the market. By being very extensive dues, one of the basic risks is the risk of interest rates: the sensitivity of the interest rate causes, in an environment of rates of increase, the low price depending on your duration or sensitivity in the price against changes in the interest rate.A good internet site to find and compare preferred actions is DividendInvestor. with where the investor can navigate the menu “Screener & Directories” and go to the submenu “Preferred Stocks”.Various alternatives will be implemented to make spreadsheets with all preferred action data grouped according to different criteria.We must make the important clarification Most of them can be redeemed (at the choice of the issuer, it is a right but not an obligation) at a price determined on a given date if they are “callables”, i.e. if there is an option that the issuer has. And there's usually them.In a low-rate context, at some opportunities, the company will exercise this silence because it could finance a new issue at a lower rate, giving it a profit in terms of lower interest paid. There is one or several redemption prices stipulated in advance, with one or several redemption dates from which the issuer may exercise this option. Remember that if the company decides to make the call or is not your decision.As for performance, the TIR of a preferred action first is calculated without taking into account the call, but its performance may be lower (greater) if the issuer redeems at some time at a lower price (greater) than the market price at that time. The issuer will rescue the issuer in a low interest rate environment (in such circumstances, the price of the preferred action increases) since the issuer could issue cheaper debt if it leaves the market. Therefore, the investor should always verify that it would be the income in the worst case, which is usually when the company decides to redeem the issue in advance to put cheaper debt to it (with lower coupons). This performance is called eield-to-worst or eield-to-call.In summary, the preferred actions are more similar to a bonus than to an action, and the investors as elijen because they have quarterly incomes that exceed the average of the market of traditional obligations by the risks mentioned above: very extensive deadlines with interest rate risk (low), early redemption risk and market volatility in the middle.

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gustavo neffa

Gustavo Neffa

I'm Gustavo Neffa. Director of Economics and Finance at FinGurú. Partner and director of Research for Traders, leading a team of market analysts. I spent the last 24 years in the financial sector in both domestic and foreign entities, having occupied the post of Senior Research Analyst in Macrosecurities of the Banco Macro and the BBVA Banco Francés, as well as economic analysts with the economist in chief of the BBVA Banco Francés. I am also a professor in Corporate Finance, Investment Portfolio Management, Financial Asset Valuation, Valuation of International Investment and Finance Projects in various MBAs and postgraduate courses in Buenos Aires and in the interior of the country and professor of the MBA of the UNLP and the UNNE of Financial Asset Assessment and the postgraduate degree in the UBA Capital Market in agreement with ByMA. Co-director of the UNLP Advanced Finance Programme.

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