Monthly income preferred stock or MIPS is a

hybrid security Hybrid securities are a broad group of securities that combine the characteristics of the two broader groups of securities, debt and equity. Hybrid securities pay a predictable (either fixed or floating) rate of return or dividend until a cert ...

created by Eli Jacobson, a Sullivan & Cromwell tax partner, and introduced to the market by

Goldman Sachs The Goldman Sachs Group, Inc. ( ) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many internationa ...

in 1993. In essence, MIPS is a combination of deeply

subordinated debt In finance, subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts if a company falls into liquidation or bankruptcy. Such debt is referred to as 'subord ...

and

preferred stock Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...

. 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 A special-purpose entity (SPE), also called a special-purpose vehicle (SPV) or a financial vehicle corporation (FVC), is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, speci ...

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 A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex ...

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 A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may r ...

consider MIPS to be preferred stock.

References

External links

Realty Income Declares Monthly Income Preferred Stock DividendsPopular, Inc. - Noncumulative Monthly Income Preferred Stock 2003 Series A

{{Corporate finance and investment banking , state=collapsed Corporate finance Equity securities Stock market