The Case For Preferred Securities in a Rising Rate Environment

Executive Summary

An often overlooked and underutilized fixed-income alternative, preferred securities offer investors compelling diversification and income opportunities in today's volatile, rising interest rate environment.

With yields and returns comparable to high-yield fixed income, quality nearing that of investment-grade credits, and low correlation with the fixed income and equity markets, today's preferred securities have evolved into a distinct and attractive income-generating asset class—boasting a variety of structures and serving as a meaningful component of an investment portfolio.

Preferred securities are a specialty of Bramshill Investments, differentiating our firm from others in the fixed income investment management arena.

An Underutilized Asset Class

Currently valued at $750 billion, the universe of US preferred securities is modest in size relative to the $4.7 trillion US investment-grade corporate bond market and the $52 trillion

US equity market. Due to their perceived complexity in structure, preferred securities are often overlooked by income-seeking investors without access to the expertise needed to capitalize on the return and yield opportunities preferred securities offer.

From a capital structure standpoint, most preferred securities are senior to equities but subordinate to senior corporate debt. However, certain hybrid securities can be issued along the capital structure spectrum.

Originally conceived as an intermediate form of capital issuance and primarily used to finance growth in utilities, preferred securities offer fixed payments or dividends from after-tax profits. These preferred share dividends are interrupted only if dividends to common shares are discontinued and do not trigger a default as would occur for an interruption in debt service. Not only may preferred securities serve as a high-quality source of consistent income for investors, but they may also offer favorable tax treatment advantages: