Baby Bonds ARE NOT Preferred Stocks
By: Tim McPartland,
100 times–no maybe 1000 times we have witnessed writers on Seeking Alpha refer to Baby Bonds (Exchange Traded Debt) as preferred stocks–it makes us down right crazy. Is a common stock a preferred stock? Is common stock a bond? Of course not! Is a baby bond the same as a preferred stock? NO!
So why does it matter? It is basic, simple and fundamental that investors understand that Baby Bonds have a higher claim on assets in the event of a bankruptcy than preferred stock–or common stock. Would you like to stand on the same rung of the ladder as the preferred stockholders at liquidation time after accepting a slightly lower coupon for the last number of years? Of course not–bond buyers accept a lower rate of return to gain a priority claim.
Baby bonds pay interest—preferred stocks pay dividends. Interest is not a qualified payment for personal income taxes. Many preferred dividends are qualified payments (taxed at a lower tax rate).
When common dividends are suspended, baby bonds are still paid. When preferred dividends are suspended baby bonds are still paid. Only at this point do the interest payments not get paid.
While this little rant may seem basic the laziness of writers to clearly define what they are writing about is inexcusable–and just downright lazy.