Definition of Canadian Originated Preferred Securities (COPrS)

A long-term subordinated debt instrument issued in Canada. COPrS (pronounced "coppers") are a type of derivative equity security invented by Merrill Lynch in the mid-1990s. The first company to offer them was TransCanada PipeLines. COPrS are not the same as preferred shares but are attractive because they have features which resemble both preferred shares and long-term corporate bonds.

Understanding Canadian Originated Preferred Securities (COPrS)

COPrS are a form of long-term, unsecured debt that is rated like bonds. They are traded on the Toronto Stock Exchange and pay interest quarterly, though the issuer usually has the option to defer paying interest for as many as 20 consecutive quarters. COPrS can be called after five years, so they are subject to reinvestment risk. Their subordinate status adds another level of risk, but also they offer a higher yield, and they are taxable investments. And although COPrS are similar to debt in the way that quarterly distributions are treated as interest for tax purpose, they trade on a cum-dividend and an ex-dividend basis, much like preferred shares, which consequently means the accrued interest is not added to the market price.

The Importance of COPrS

COPrS are most well-known for their role as a chief financing instrument in TransCanada PipeLines Limited, a major North American energy player, whose operation includes Canadian Natural Gas Pipelines, the U.S. Natural Gas Pipelines, and Mexico Natural Gas Pipelines, as well as numerous power plants. In 1996, as part of its overall effort to expand its unregulated and international businesses reach, TransCanada issued COPrS instruments, as an add-on to the previously-issued Trust Originated Preferred Securities (TOPrS). Together, COPrS and TOPrS represented more than half of the company’s preferred capital component. However, COPrS and TOPrS have some key differences. Pointedly: with TOPrS, TransCanada PipeLines had retained its ability to pay deferred interest in common stock, rather than cash, to investors. And although the ultimate dividend payment to the existing preferred stockholders was limited by provisions in the company's senior debt indentures, no such restrictions applied to the COPrS.

In any case, TransCanada's more conservative approach to funding its new venture was viewed as an attractive option for investors looking for lower risk profiles and relatively stable earnings and cash flows.

While Merrill Lynch has trademarked the COPrS title, many other similarly structured unsecured debt instruments have since rolled out.