Monthly income preferred stock (Ofer Abarbanel online library)

Monthly income preferred stock or MIPS is a hybrid security created by Eli Jacobson,[1] a Sullivan & Cromwell tax partner, and introduced to the market by Goldman Sachs in 1993.[2] In essence, MIPS is a combination of deeply subordinated debt and preferred stock.

MIPS is structured in such a way as to make payments on the security an interest expense for the borrower and dividend for the lender. A special purpose entity of the issuer sells the preferred stock to the public and then lends the proceeds to the parent. The parent’s interest payments to the subsidiary are tax-deductible as interest and are used by the SPE to pay preferred dividends to the investors.[3] However, the interest income received by the SPE is not taxable income, because it is organized as a tax-free entity.

Because of these features, MIPS at one point dominated the market for traditional perpetual preferred equity, accounting for over 70% of all new preferred issues.[4] However, MIPS as a tax shelter no longer works. The credit rating agencies consider MIPS to be preferred stock.

References

  1. ^“Eliyahu D. Jacobson”. Web.archive.org. 5 March 2016. Retrieved 13 February 2019.
  2. ^“FindArticles.com – CBSi”. Findarticles.com. Retrieved 13 February 2019.
  3. ^Kenton, Will. “Monthly Income Preferred Securities – MIPS”. Investopedia.com. Retrieved 13 February 2019.
  4. ^Irvine, Paul; Rosenfeld, James (2000). “Raising Capital Using Monthly Income Preferred Stock: Market Reaction and Implications for Capital Structure Theory”. Financial Management. 29 (2): 5–20. CiteSeerX 1.1.202.7889. doi:10.2307/3666282. JSTOR 3666282.

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Ofer Abarbanel online library

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Ofer Abarbanel online library