Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Quarterly Income Preferred Securities (QUIPS)

What it is:

Quarterly income preferred securities (QUIPS) are hybrid, preferred-stock-like securities issued by Goldman, Sachs & Co.

How it works (Example):

QUIPS are shares of preferred stock issued by a special purpose foreign or domestic LLC. The LLC is usually a wholly owned subsidiary of a U.S. parent corporation.

The LLC loans the proceeds to the parent. The parent receives the proceeds and pays interest to the LLC, which uses the money to pay quarterly dividends to QUIPS holders. Because the LLC is a partnership, the full amount of the interest payments has to flow through to the QUIPS holders.

QUIPS typically have maturities of 30-50 years and par values of about $25. In some cases, the issuer can extend the maturity.

QUIPS are usually listed on an exchange, and they trade like preferred stock.

Why it Matters:

QUIPS are essentially subordinated debt issued by the parent, but they look like preferred stock. However, because the parent is technically getting a loan from its subsidiary, it gets to deduct the interest payments on its tax return.

It is important to note that the issuer can suspend or defer its dividends—even though they are actually interest payments—and not trigger default. For investors, this adds risk. Also, the structure doesn't raise the parent's debt levels and thus doesn't jeopardize its debt ratios.
 

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