What Are Canadian Originated Preferred Securities (COPrS)?
Canadian Originated Preferred Securities (COPrS) are a type of long-term subordinated debt instrument introduced by Merrill Lynch in the mid-1990s. COPrS (pronounced like "coppers") are only issued in Canada. COPrS share some of the same features as preferred shares issued by U.S. companies.
- Canadian Originated Preferred Securities (COPrS) are a type of long-term subordinated debt instrument introduced by Merrill Lynch in the mid-1990s.
- These securities are only issued in Canada.
- They share some of the same features as preferred shares in the U.S.
Understanding Canadian Originated Preferred Securities (COPrS)
COPrS are a form of long-term, unsecured debt. They are rated like bonds and traded on Canadian stock exchanges. COPrS pay interest quarterly (although the issuer usually has the option to defer paying interest for as many as 20 consecutive quarters).
COPrS can be called—or repurchased by their issuers—after five years, so they are subject to reinvestment risk. Reinvestment risk refers to the probability that an investor will not be able to reinvest cash flows—such as coupon payments—at a rate equal to their current return.
The subordinate status of COPrS adds another level of risk, but they also offer a higher yield. They are also taxable investments. And although COPrS are similar to debt because quarterly distributions are treated as interest for tax purposes, 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 first company to offer COPrS was TransCanada (as of 2019, TransCanada operates under the name TC Energy). TC Energy was founded in 1951 to develop the TransCanada Pipeline (now called the Canadian Mainline).
While Merrill Lynch has trademarked the COPrS title, many other similarly structured unsecured debt instruments have since rolled out.
COPrS are most well-known for their role as a chief financing instrument in TransCanada PipeLines Limited, a major North American energy company that constructs and operates energy infrastructure, whose operations include 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 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.