Hybrid securities – preference shares
Preference shares may either be unlisted or listed, and may be classified as either equity (depending on the preference structure) or debt.
From the equity perspective, the preference share may be represented as an additional class of equity (despite the hybrid tag) differentiating itself from an ordinary share in its basic rights (for example, voting rights and liquidation preferences).
From the hybrid perspective, the preference share may be more akin to a debt instrument where a number of debt-like features comprise the elementary features of the preference share – for example, in the form of a reset preference share (RPS) that may include a conversion option, fixed dividend, step-up rights and redemption.
Valuing a preference share
In valuing a preference share, we would expect to see that you have taken into account relevant factors that may affect the characterisation (that is, equity or debt classification) and valuation of the preference share.
While a preference share may trade on a recognised exchange, you will need to consider certain factors concerning the preference share's structure (including attached rights) when assessing its market value, including:
- issue date
- issue rating
- issue price
- reset dates (if applicable)
- dividend rate
- dividend payment period
- whether it is cumulative or non-cumulative
- whether it is redeemable or non-redeemable
- conversion details (if applicable)
- conversion discount (if applicable)
- voting rights
- liquidation preferences.
Some of these factors may also apply to a number of hybrid structures more widely.
Where you use a traded preference share (such as an RPS) as a benchmark in assessing the market value of a debt instrument, we would expect you to exclude the equity factors embedded in the pricing of the preference share.
In deriving the value of an ordinary share by reference to preference shares issued by a company, we would expect to see the rights attached to the preference shares incorporated fully into any valuation.
We do not expect to see preference shares valued at their paid-up value unless warranted by industry standards. We would expect to see the rights of the preference shareholders fully incorporated and priced in the market value of the ordinary shares for the valuation of a start-up firm where a senior class of shares was subsequently issued.