Trust-preferred security
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A Trust preferred security is a security possessing characteristics of both equity and debt issues. A company creates trust-preferred securities by creating a trust and issuing debt to the new entity, while the trust issues the trust preferred securities.
The security is similar to debentures and preferreds in that it is generally longer term, has early redemption features, makes periodic fixed or variable interest payments, and matures at face value.
[edit] Usages
Trust preferreds have been created by companies for their favorable accounting treatments and flexibility. Specifically, these securities are taxed like debt obligations by the IRS, while having many characteristics of equities. They are recorded as debt in a company's accounting statements as according to GAAP procedures, but may be treated as capital for regulatory purposes.
Because the interest paid to the trust is tax-deductible, the company may enjoy a significantly lower cost of funding.
