Convertible preferreds are convertible to another class of asset (e.g. common shares) at a specified date (generally 5 to 12 years after issue) and a specified price (10% to 15% over the common share price as determined at the time of issue). The conversion privilege generally expires at the maturity date. The premium serves to discourage early conversion. Demand for this type of preferred is related to the fact that its dividend is often lower than that of, say, a conventional preferred. Investors are attracted to convertible preferreds for their combination of income and potential for appreciation. Most convertibles are callable by the issuer before maturity, a right the issuer could exercise if the conversion value overtakes the par value. At the end of the convertibility period a convertible preferred becomes a simple conventional preferred. In summary, convertibles have the characteristics of preferreds plus an option for the holder to convert to common shares. In this they resemble convertible bonds.
Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Associate Portfolio Manager