Retractable Preferred Shares

Retractable preferred shares are a specific type of preferred stock that lets the owner sell the share back to the issuer at a set price. Typically, the issuer can force the redemption of the retractable preferred share for cash at maturity. Sometimes instead of cash, retractable preferred shares can be exchanged for common shares of the issuer. This may be referred to as a “soft” retraction compared with a “hard” retraction where cash is paid out to the shareholders.

This type of stock resembles a fixed-income bond but pays dividends instead of interest. The retractable feature allows for the value of these shares to remain steady at or above par value, as compared to the price of traditional preferred shares that fluctuate with changes in interest rates.

The terms that bind retractable preferred shares must be explained in a prospectus from the issuer. There are instances where preferred shares lack a date of maturity when granted. However, if the issuer does set a maturity date, they can compel shareholders to exercise their options to redeem those shares for a preset payment amount. Retractable preferred shares might be issued by companies that foresee an accumulation of supplemental money in their future, but at the time the capital is not available.

The expectation is that by offering retractable preferred shares, they will be able to raise and access capital more immediately for operations that could otherwise be delayed or limited. Once the company has generated the anticipated additional capital, it could be in a better position to buy back those shares. When those shares later mature, shareholders will sell back the stock and the company will not need to continue making dividend payments. There may be terms, however, that require the company to pay all the dividends within a given period before the company can retract the shares, thus ensuring the investors receive the cumulative dividends they are due.

Retractable preferred shares are comparable to (but still different from) redeemable preferred shares. With retractable preferred shares, a company can repurchase redeemable preferred shares after a certain date is reached, including calling the stock and forcing the retirement of the shares for cash, compared with exchanging them for common stock. The call price on redeemable shares can actually be lower than the current market value, which would let the company recoup the shares at a discount but in effect would reduce the return for investors.