CandleFocus

Quarterly Income Preferred Securities (QUIPS)

Candlefocus Editor
Quarterly Income Preferred Securities (QUIPS) are investment products that simultaneously provide investors with an income stream and companies issuing the securities with a tax benefit. QUIPS consist of share offering in a limited partnership or subsidiary of an existing company that has been created solely to effectively issue the shares. The proceeds from QUIPS are loaned back to the parent company, which then pays interest on the borrowed money to the investors who have purchased the QUIPS.

The tax benefit of QUIPS to companies comes from the ability to take a tax deduction on the interest payments they make. This form of investment financing allows companies to raise money without increasing their debt-to-equity ratio, and allows them to maintain a healthy capital structure. Notably, the issuing entities are not obligated to pay out dividends to their QUIPS owners, meaning it is not a guaranteed income stream. The only recourse QUIPS investors have in the event they do not receive dividend payments is to try to recover the principal from the loan from the parent company.

Despite this, QUIPS offer an attractive proposition for both companies and investors. When making an investment decision, it is important for investors to weigh the risks against the rewards of QUIPS, as is the case with any other security. It is also important to understand the corporate structure in which a QUIPS operates, and so familiarize yourself with the company and its business model to better assess the security.

QUIPS are a powerful financing option and can provide firms with a variety of benefits while also offering investors an income stream. The structure is complex and is not suitable for every situation - but for the right firm, at the right time, QUIPS can provide an attractive option for raising much-needed funds.

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