Mandatory Convertible Preferred Stock — Glossary

The longer version

This is a preferred security that pays a dividend, typically at a fixed rate, and then converts automatically into common shares on a set date, usually a few years after issue. Unlike ordinary convertible securities, the holder cannot choose to keep it as preferred, and the company does not have to repay the principal in cash.

The number of common shares the holder receives usually depends on the share price at conversion, within a range. If the price has risen a lot, the holder receives fewer shares, which caps the gain. If it has fallen, the holder receives more shares, but they are worth less, so the holder is still exposed to losses.

Companies like it because it raises money now, pays no principal back and ends as common equity. It is often given partial or full equity credit by rating agencies. For existing common holders, the future conversion means dilution that is built in.

Read the conversion ratio range, the dividend, the conversion date, and include the future shares when you calculate diluted ownership.

Where we use “Mandatory Convertible Preferred Stock”

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The longer version

Where we use “Mandatory Convertible Preferred Stock”

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