Are Preferred Freezes in Your Arsenal?

Are Preferred Freezes in Your Arsenal?

MPI is often called upon by estate planning professionals to provide expert opinions in the context of establishing preferred stock and preferred freeze partnership structures. Given relevant federal tax rules and regulations, including the provisions of Internal Revenue Code Section 2701, it is critical that clients have a highly qualified team of professionals providing the appropriate support in these matters. MPI has the experience and expertise necessary to assist clients with preferred equity structures, and leans on its proprietary databases and models to support its opinions.

MPI Preferred Stock Model

MPI recently completed an update of its preferred stock database and model as of October 31, 2015. Despite the general consensus that the Federal Reserve will increase the federal funds rate in December, the continuing low interest rate environment has manifested itself in historically low preferred stock yields. As of October 31, 2015, the median yield of 142 publicly traded preferred stock issues that met MPI’s criteria for inclusion in its latest model was 5.7%. The yields ranged from 3.3% to 8.8% for the middle 80% of the observations. The database includes preferred stocks from issuers in a variety of industry categories, including asset management, capital markets, hospitality, industrial machinery, insurance, media, oil and gas, real estate and telecommunications.

Prices of preferred stock for the most highly leveraged issuers generally traded at yields of between 6.0% and 9.0%. For our private clients considering various estate planning alternatives, these capital market conditions might warrant consideration of a preferred freeze structure. At other points in history, highly leveraged preferred stock may have traded at significantly higher yields.

Factors that seem to drive investors to demand higher or lower yields in today’s market include asset coverage, earnings coverage, the issuer’s total leverage, and the size of the issuing company. Weaker issues, such as those with lower asset and earnings coverage ratios, tended to trade at yields between 6.5% and 8.5%. Preferred stocks of smaller sized companies tended to trade at yields between 6.5% and 8.0%.

New Preferred Issues

Several new issues came to market in recent months. On August 24, 2015, Digital Realty Trust Inc. issued 10.0 million shares of perpetual, callable preferred stock at $25.00 per share with a stated dividend rate of 6.35%. The shares are callable at $25.00 on August 24, 2020. Digital Realty Trust, Inc. owns, acquirers, repositions and manages technology-related real estate. The securities issued are currently rated Baa3 by Moody’s and BB+ by Fitch.

On August 3, 2015, Charles Schwab Corp. issued Series C perpetual, callable preferred stock at $25.00 per share with a stated dividend rate of 6.00%. The shares are callable at $25.00 on December 1, 2020. Charles Schwab Corp. provides wealth management, securities brokerage, banking, money management and financial advisory services. The securities issued are currently rated Baa2 by Moody’s and BBB by Standard & Poor's.

MPI regularly provides opinions to clients that are establishing terms for preferred stock and preferred freeze partnerships. If you have any questions about the MPI Preferred Stock Model or our valuation and advisory services, please contact your local MPI representative.

For additional information pertaining to MPI or MPIS and our valuation and advisory services, visit www.mpival.com.

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About MPI

MPI, a prestigious national consulting firm founded in 1939, specializes in business valuation, forensic accounting, litigation support and corporate advisory work. MPI provides fairness opinions, sell-side and buy-side advisory services through its investment banking affiliate MPI Securities, Inc. MPI conducts every project as if it is going to face the highest level of scrutiny, and its senior professionals have extensive experience presenting and defending work product in front of financial statement auditors, management teams, corporate boards and fiduciaries, the IRS, other government agencies, and in various courts.