Monthly Income Preferred Securities (MIPS): Overview

Definition of Monthly Income Preferred Securities (MIPS)

Shares are an interest in a limited partnership existing solely for issuing preferred securities and lending the proceeds to its parent company. MIPS usually have a $25 par value, NYSE listing, and cumulative monthly distributions.

Understanding Monthly Income Preferred Securities (MIPS)

MIPS are hybrid securities, combining features of preferred stock and corporate bonds. Hybrids can pay a higher rate of return than preferred stock because dividends are paid with pretax dollars, generating a sizable tax break for corporations. But one of the biggest draws for corporations implementing MIPS programs is the tax-related savings they enjoy without raising the corporation’s debt ratio. Major companies often undertake preferred stock exchange offers to redeem existing preferred stock and replace it with tax-deductible MIPS.

From an investor’s perspective, MIPS offer several advantages. Chief among them, the securities tend to offer higher yields than those associated with money market funds, certificates of deposit, and other alternative investments. MIPS is generally viewed as a convenient method for investors to invest in instruments similar to long-term corporate debt. Prior to the creation of MIPS, individual investors with relatively small amounts to invest did not have this opportunity because corporate debt is typically sold in lots of $5,000 or more, necessitating a minimum purchase of five $1,000 bonds. Contrarily, MIPS’ typical $25 per unit cost makes the fixed-income market more readily accessible to individual investors. In addition, there is a robust liquid secondary market for these securities because these hybrid preferred securities offer higher yields than corporate bonds and conventional preferred stock.

MIPS must adhere to a strict set of procedural guidelines. A few essential procedural rules are as follows:

• The proceeds from the sale of the MIPS are transferred to the parent entity as a loan by the limited partnership or limited liability company.
• Dividends on the MIPS must be made to security holders on the last day of every calendar month.
• The funds used to pay the dividends are generated from interest payments made by the parent to the LLC for the loan.
• When the loan between the parent corporation and the LLC matures, the MIPS are redeemed.
• MIPS are typically listed for trading on the New York Stock Exchange similar to regular preferred stock.