Nordic Credit Rating (NCR) notes that a number of Nordic corporations issue preferred shares as a part of their capital structure. Preferred shares diversify an issuer's capital structure and provide equity investors with predictable returns at the expense of the upside potential of common shares. In addition, preferred shares often confer voting rights. Despite features that are compatible with common equity, rating agencies often assess the equity content of preferred shares as lower than that of common equity and include a portion of the shares in their debt metrics and/or a portion of the prescribed dividend in their interest coverage metrics.
"NCR accepts that there is a role for preferred shares in an issuer's capital structure to diversify the investor base, provide access to new capital and support senior creditors," says Sean Cotten, chief ratings officer at Nordic Credit Rating. "However, we tend to view capital structures that include preferred shares as somewhat weaker than those with only common equity, primarily because of investor expectations that dividend payments will be paid in all but the most significant periods of stress and given the presence of financial penalties for delaying preferred dividends."
In this commentary NCR explains its views on preferred shares when evaluating the financial risk of individual companies and explains how equity treatment of preferred shares affect our corporate issuer and issue ratings.
Analyst contact details:
Mille O. Fjeldstad, +47 99 03 89 16, mille.fjeldstad@nordiccreditrating.com
Sean Cotten, +46 732 324 378, sean.cotten@nordiccreditrating.com
Marcus Gustavsson, +46 700 442 775, marcus.gustavsson@nordiccreditrating.com