Fixed-Rate Capital Securities (FRCS)

What Are Fixed-Rate Capital Securities (FRCS)?

A fixed-rate capital security (FRCS) is a security issued by a corporation that has a $25 par value (albeit some are issued with a $1,000 par value) and offers investors a combination of the highlights of corporate bonds and preferred stock. These securities give the benefits of appealing yields:

• Fixed month to month, quarterly, or semiannual income
• Investment time periods that are generally unsurprising (20-49 years, however some are perpetual)
• Investment-grade credit quality (much of the time)

Figuring out Fixed-Rate Capital Securities (FRCS)

Fixed-rate capital securities are financial hybrid instruments that can be structured either as debt or equity, contingent upon the way things are introduced in the prospectus. Rating agencies have taken a positive perspective on this financing device for the issuer since it gives long-term capital and permits the deferral of interest payments to investors should the issuer experience financial challenges.

Notwithstanding, as with preferred stock, such deferrals can happen in the event that the parent company stops any remaining stock dividend payments. With deferred interest securities, investors are not guaranteed income by holding FRCS, particularly when the issuer is in financial distress. The interest deferral option on FRCS places the security at a higher risk than preferred stock or corporate bonds and, in this manner, offers a higher yield to investors.

New and secondary issues of FRCS are listed on the New York Stock Exchange (NYSE) and can likewise be traded over the counter (OTC). On the secondary markets, they will generally trade in basically the same manner to traditional bonds, selling at premiums and discounts to par in light of the security's stated coupon rate relative to winning interest rates, as well as the market's perceptions concerning the credit quality of the issuer.

Unique Risks of FRCS

Dissimilar to common and preferred stock dividends, the distributions made on fixed-rate capital securities are completely tax-deductible for the issuer, which is like how the interest payments on traditional debt instruments are dealt with. In the event that a change in tax law reduces or kills the corporation's tax advantage, the company could execute a "unique event" redemption or extraordinary redemption option, permitting the issuer to reclaim the securities at the liquidation value prior to maturity.

Fixed-rate capital securities are rated for credit quality by the different rating agencies including Standard and Poor's and Moody's. Issues with lower credit rating pay a higher yield to investors to make up for the perceived risk. Nonetheless, most FRCS are rated investment grade.

In any case, FRCS carry a greater degree of risk, given that it positions lower in the corporation's capital structure than senior debt. In the event of default or liquidation, senior debtholders will be reimbursed first before FRCS investors get their investment back. FRCS holders really do have a higher claim on the issuer's assets than would be ideal and common stock holders.

Developments in the market might influence the daily trading prices of these hybrid securities. For example, FRCS prices normally decline on ex-dividend days, which are the dates that purchasers of FRCS are not qualified for receive the dividend. Even however the securities are traded in the open market, FRCS are considered decently illiquid, particularly while winning interest rates in the market increase.

Features

• Fixed-rate capital securities (FRCS) are hybrid securities issued by certain corporations that join elements of corporate bonds and preferred shares.
• While rated investment grade a large part of the time, FRCSs are riskier than corporate bonds and trade in more illiquid markets.
• FRCS frequently accompany a lower par value than a bond and offer investors a constant flow of dividend income.