Fixed Rate Capital Securities (FRCS) are a hybrid instrument issued by a corporate issuer that combines the features of a bond and a preferred share.
Thus, similar to bonds, the FRCS:
— are subordinated debt in the company’s capital structure;
— provide for regular fixed payments (monthly/quarterly/semiannually);
— are subject to tax benefits pertaining to raising funds through the bond placement;
— as a rule, have a predetermined maturity date.
At the same time, the FRCS:
— are denominated and traded in units of shares;
— are quoted in currency, not as a percentage;
— may suspend payments if the issuer does not pay dividends on its shares.
Most FRCS have an interest rate above the market average and their credit rating is at an investment level (for example,
W.R. Berkley, 5.625% 30apr2053, USD,
Brunswick, 6.375% 15apr2049, USD). According to rating agencies, the security reliability level is conditioned by the fact that this instrument is intended for long-term borrowing and allows the issuer to stop payments, if necessary. Moreover, securities of this type may be redeemed early in case of changes in tax laws that will affect the FRCS and their issuer.
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