Capital Securities

Typically a trust preferred security. A company establishes a trust, which sells trust preferred securities in a public offering. The proceeds from the sale of the trust preferred securities are used to purchase junior subordinated debentures of the parent company. The company makes interest payments to the trust, which are passed on as distributions to the trust preferred security holders. At maturity the trust returns the face amount of the trust preferred securities to the holders, using the principal of the debt securities received by the trust upon the simultaneous maturity of the debt securities. Trust preferred securities – and the underlying debt securities – typically have a long maturity (at least 30 years) subject to an earlier optional redemption by the company.

Mandatory Convertible Securities

A hybrid security that by its terms converts into a variable number of shares of common stock of the issuer based on the market price of the common stock at the time of conversion. Mandatory convertible securities are typically sold as units consisting of (i) a forward contract to purchase common stock on a predetermined date at a price based on a disclosed formula and (ii) debt securities that are used as collateral for the investor’s obligation under the purchase contract. The holders of the mandatory convertible securities receive distributions of interest on the debt securities up to the conversion date. Typically, the issuer will remarket the debt securities prior to the conversion date at an interest rate that is reset to reflect the then current market rate. If the remarketing is successful, the proceeds will be used to make the required payments under the purchase contracts. If the remarketing is unsuccessful, the issuer will retire the debt securities in lieu of receiving the required payments under the purchase contracts.

Repackaged Securities

Repacks are trust certificates that represent an interest in the assets of a single trust. A sponsor, typically an investment bank, purchases corporate debt or capital securities of an unrelated company and sells the securities to a newly formed trust. The Repacks issued by the trust have set maturity dates which correspond to the maturity of the underlying securities and typically range from 25 to 50 years, but can be called prior to maturity, typically at par or face value. A typical Repack also offers a call protection period, generally five to seven years from issuance, and is subject also to a call of the underlying securities.

Retail Debt Securities