Why does Preferred trade at discount to Ordinary?

Question

why do they? Do voting rights carry most of the premium? Do they always trade at a spread or do they sometimes converge?

smuguy97 · Accepted Answer

Preferred stock is generally used as a more flexible form of financing than debt, since the payments are usually PIK (i.e., non-cash) and only get paid out when funds are sufficient (e.g., having insufficient proceeds required to pay the full PIK on preferred equity would not trigger a technical default as it would with sub-debt or mezzanine financing).

Within the context of LBO's, preferred equity is often a larger portion of total equity than common equity (e.g., a deal structure may have 99% preferred and only 1% common equity); this is particularly useful when structuring options for the

smuguy97 · Answer

In addition to voting rights, preferred equity generally carries a minimum return (e.g., 8%) that is usually paid-in-kind.

Preferred equity is also senior to common equity in the capital structure, so holders of preferred securities have the right to receive up to 100% of their principal + accrued PIK interest before the common equity sees a dime.

The offset to this, of course, is that preferred equity doesn't generally participate in the upside that common equity receives.

Because of this tradeoff, preferred units may trade at a discount or a premium to common units depending on a number o

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Why does Preferred trade at discount to Ordinary?

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Why does Preferred trade at discount to Ordinary?

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