Monthly income preferred stock
Encyclopedia
Monthly income preferred stock or MIPS is a hybrid security
created by Eli Jacobson, a Sullivan & Cromwell
tax partner, and introduced to the market by Goldman Sachs
in 1993. 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 dividend
s to the investors. 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. However, MIPS as a tax shelter no longer works. The credit rating agencies consider MIPS to be preferred stock.
Hybrid security
Hybrid securities are a broad group of securities that combine the elements of the two broader groups of securities, debt and equity.Hybrid securities pay a predictable rate of return or dividend until a certain date, at which point the holder has a number of options including converting the...
created by Eli Jacobson, a Sullivan & Cromwell
Sullivan & Cromwell
Sullivan & Cromwell LLP is an international law firm headquartered in New York. The firm has approximately 800 lawyers in 12 offices, located in financial centers in the United States, Asia, Australia and Europe. Sullivan & Cromwell was founded by Algernon Sydney Sullivan and William Nelson...
tax partner, and introduced to the market by Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
in 1993. In essence, MIPS is a combination of deeply subordinated debt
Subordinated debt
In finance, subordinated debt is debt which ranks after other debts should a company fall into receivership or bankruptcy....
and preferred stock
Preferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
.
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
Special purpose entity
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
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 dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s to the investors. 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. However, MIPS as a tax shelter no longer works. The credit rating agencies consider MIPS to be preferred stock.