Learn all about Retractable Preferred Shares, their characteristics, and examples. Understand key features that affect their value and how they compare to other financial instruments in volatile market conditions.
A retractable preferred shareholder can force the company to buy back retractable preferred shares for cash on a specified date, at a specified price. Some are issued with two or more retraction dates. The principle of retraction, or pulling back, is identical to the principle for retractable bonds and debentures, which we discussed in Chapter 6.
The holder of a retractable preferred can create a maturity date for the preferred by exercising the retraction privilege and tendering the shares to the issuer for redemption. The term soft retractable preferred refers to those retractables where the redemption value may be paid in cash or in common shares, generally at the election of the issuer.
JKL Inc., Series 14, Cumulate Class A Preference Shares are retractable on the first of each March, June, September, and December at $100 per share.
From the standpoint of the purchaser, retractable preferreds have the following characteristics:
Retractable Date and Price: They provide a predetermined date and price at which to tender shares for retraction. The shorter the time interval to the retraction date, the less vulnerable the stock’s market price is to increases in interest rates. A straight preferred declines in price as interest rates rise, whereas a retractable preferred will not fall significantly below its retraction price as the retraction date approaches.
Capital Gain: They provide a capital gain if purchased at a discount from the retraction price and subsequently tendered at the retraction price.
Market Behavior: They sell above the retraction price and at least as high as the call price when interest rates decline sufficiently.
Action Requirement: They do not retract automatically; the retraction privilege expires if no action is taken by the holder during the election period.
Reversion to Straight Preferred Shares: They become straight preferred shares if they are not retracted when the election period expires. If this occurs in a period of high or rising interest rates, the stock’s market value declines. The shares sell on a straight yield basis after the retraction privilege expires.
Predetermined Retraction: Retractable preferred shares provide investors with a predetermined date and price for retraction, helping reduce market price vulnerability to interest rate increases.
Potential for Capital Gain: Investors can achieve capital gains by purchasing shares at a discount and selling at the retraction price.
Impact of Interest Rates: The market value can significantly vary with changes in interest rates, performing differently compared to straight preferreds.
Active Management Required: Retraction is not automatic; investors need to be proactive during the election period to utilize this privilege.
Reversion Risk: During periods of inaction or expiry of retraction privileges, shares revert to straight preferred status and may suffer in regions of high interest rates.
Q: What are soft retractable preferred shares?
A: Soft retractable preferred shares are those where the redemption value may be paid in cash or in common shares, generally at the election of the issuer.
Q: What happens if I don’t retract my preferred shares during the election on retraction date?
A: If you do not take action during the election period, your retractable preferred shares may convert to straight preferred shares after the retraction privilege expires.
Q: Should I be concerned about interest rate fluctuations with retractable preferred shares?
A: Retractable preferred shares are generally less vulnerable to interest rate increases as the retraction date approaches, but declining interest rates can drive their market value above the retraction and call prices.
Retractable Shares: Preferred shares that can be sold back to the issuer at a predefined price on a specific date.
Election Period: The timeframe within which holders must exercise their retraction privilege.
Straight Preferred Shares: Preferred stock without built-in retraction or conversion features which trade mainly based on dividend yield.
Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC® exam practice questions designed to reinforce the key concepts covered in our free Canadian Securities Course. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨
Good luck!
🚀 Launch Date: April 14th
🎉 Now On App Store!
📱 Available on iPhone and iPad
📚 Master the CSC® Exam with our top ranked iOS app! Packed with thousands of sample questions, it's your perfect study companion for acing the Canadian Securities Course Certification exams!
🎯 Achieve Your Professional Goals with ease. Try it now and take the first step towards success!
✨ Download Today! ✨