Preferred stock grants holders priority for receiving dividends, however does not impart them with voting rights: Preferred stock makes it possible for companies to diversify their financing methods while reducing leveraging.
In its meeting last Thursday (March 2, 2017), the TASE Board of Directors approved principles for setting guidelines that will enable companies to issue preferred stock. Preferred stock is defined as a stock that grants holders priority for receiving dividends, however without granting them voting rights.
Further to several recent requests submitted to the Israel Securities Authority and to TASE concerning the possibility for issuing preferred stock, the matter was investigated professionally, including a review of the situation worldwide, examining existing types of preferred stock and assessing the needs of companies in Israel. This was followed by a proposal, jointly formulated by the staffs of the TASE and the Israel Securities Authority, for laying down rules that will enable companies to issue and list preferred stock for trading, thereby allowing them to diversify their financing methods.
Preferred stock confers priority to holders in their right to receive a dividend, as defined in its conditions. Distribution of dividends to holders of common stock will be possible only after holders of preferred stock are paid their dividends. Preferred stock will be cumulative; thus if the dividend is not paid out on schedule it will accumulate until its payment. Furthermore, a company can decide that its preferred stock will also participate in common stock dividend; however, it is not obligated to do so.
The issuing of preferred stock carries advantages for both companies and investors. For companies, this is a relatively cheaper way to raise capital than the issue of common stock and it avoids diluting the voting rights of holders of common stock. Issuing preferred stock allows a company to reduce its leveraging since stock of this type is likely to be considered as capital (in full or partially). This allows companies to engage in additional debt financing, reduce the cost of new debt financing, or meet assorted financial covenants.
Additionally, as a financial instrument, preferred stock affords financial flexibility: for example, in periods where a company wishes to finance its operations, make investments, or repay debts, the company, through a preferred stock issue, can postpone the dividend payment to the subsequent year without the risk of default.
From the standpoint of investors and their priority in receiving the dividend—preferred stock allows them to receive dividends before holders of common stock do; furthermore they are aware of the extent of the dividend assured them. Historically in the U.S., the annual dividend yield of preferred stock is higher than that of other instruments; moreover, preferred stock has a low correlation to bonds and common stock, which enables investors to diversify their investments and reduce risk.
In order to preserve liquidity of both common and preferred stock, the issuing of preferred stock will be possible only for companies whose public float holdings of common stock meet the requirements as those applicable to new companies.
Additionally, the issue of preferred stock will be allowed only to companies that are included in the TA-125 and SME60 indices or, alternatively, companies whose market value exceeds NIS 500 million.
Hani Shitrit Bach, Senior Vice President, Head of the Listing and Economics Department: "This is a new instrument that is traded on global stock exchanges. Preferred stock, as a financial instrument, is positioned between stocks and bonds. Opening up the possibility to issue preferred stock serves both the traded companies and the investment community. For their part, the companies will be able to diversify their financing methods and gain financial flexibility while the investment community will be able to invest in companies that pay out dividends regularly with the certainty of the dividend yield and its priority over common stock".