Preference Equity Redemption Cumulative Stock (PERCS)

What Is Preference Equity Redemption Cumulative Stock?

Preference equity redemption cumulative stock (PERCS) is a equity derivative that is classified as a hybrid security and automatically converts to equity at its pre-determined maturity date.

Grasping Preference Equity Redemption Cumulative Stock (PERCS)

Preference equity redemption cumulative stock (PERCS) is a convertible preferred stock with an enhanced dividend that is limited in term and participation. PERCS shares can be changed over for shares of common stock in the underlying company at maturity. On the off chance that the underlying common shares are trading below the PERCS strike price, they will be traded at a rate of 1:1; yet in the event that the underlying common shares are trading over the PERCS strike price, common shares are traded exclusively up to the value of the strike price.
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PERCS are basically a form of a covered call option structure and are famous in an environment of declining yields in view of the enhanced dividend. Upside profits are limited to create a higher yield. PERCS can typically be recovered before the maturity date, however at a premium to the cap price. Typically, on the off chance that a holder of a PERCS doesn't recover the shares inside the commanded time skyline — generally a three-to five-year duration — the shares are automatically switched over completely to common stock shares and the dividends return to those ordinary dividends that sounds paid on that common stock, truly.

PERCS falls under the umbrella of a modern convertible security known as mandatory convertibles.

Mandatory convertibles are securities that have their own unique set of risk and reward qualities, yet they all share comparable fundamental elements. These incorporate an upside potential that is typically not exactly that of the underlying common stock, due to the way that convertible purchasers must pay a premium for the privilege of changing over their shares, and higher than market (enhanced) dividend rates.

There are three primary qualities of a mandatory convertible security, and these are true for PERCS too:

1. They must have a mandatory conversion to the underlying stock.
2. They must have a dividend yield that is higher than that of the underlying stock.
3. Holder is qualified for capital appreciation, however it will be limited when compared to the appreciation capability of the underlying stock.

Other common mandatory convertibles are:

• Dividend enhanced convertible stocks (DECS)
• Preferred redeemable increased dividend equity security (PRIDES)
• Automatically convertible equity securities (ACES)
• Structured yield product exchangeable for stock (STRYPES)

PERCS Example

In the event that you own 10 PERCS on XYZ company with a strike price of $50, at maturity the accompanying two results could occur:

1. If, at maturity, the underlying asset was trading at $40, you would receive a total of 10 common shares, worth $40 each.
2. If, at maturity, the underlying asset was trading at $100, you would receive shares up to the total value of the PERCS strike price, which, in this case, would be five shares worth $100 each. The total value of the shares ($500) traded will rise to the original strike price of $50 x 10 shares.

Simultaneously, say the dividend paid on common shares of XYZ is $1.00 each year. The PERCS shares could pay a dividend of $1.20 each year to their holders.

Features

• Preference equity redemption cumulative stock (PERCS) is an equity derivative that is classified as a hybrid security and automatically converts to equity at its pre-determined maturity date.
• PERCS are basically a form of a covered call option structure and are well known in an environment of declining yields due to the enhanced dividend.
• PERCS falls under the umbrella of a modern convertible security known as "mandatory convertibles."