What Is Income Deposit Security (IDS)?
Income deposit security (IDS) is a hybrid investment instrument that combines common stock and high-yielding notes of the issuer to provide regular income payments to the holder of the security. The holder of the income deposit security receives dividends from the common stock and fixed income payments from the debt instrument in the IDS. Also known as "enhanced income security."
Understanding Income Deposit Security (IDS)
Income deposit securities are traded on stock exchanges as a packaged unit and the two components can be separated later and traded individually. The cash flow to investors consists of dividends from the common share and interest payments from the bond. Another attractive feature to the investor is the capital appreciation potential of the stock held in the IDS. The companies that issue this form of security are usually very stable and mature businesses, as they must be able to deliver the interest payments out of free cash flows. Because the high-yield bond component is a subordinated security, the issuer pays a higher coupon than for an unsubordinated note. A primary motivation for companies to issue income deposit securities is to generate a tax shield through the deduction of the interest payments from operating income.
IDS: A Rare Animal
Income deposit security, a Bay Street product innovation, held some promise in the early 2000s when it was introduced. Some companies issued the securities when they were first introduced, but they did not take hold on the market. There are relatively few of these securities in the market today. An example of a past IDS is one issued by B&G Foods, Inc., which packaged a share of Class A common stock with a 12% senior subordinated note due 2016. The IDS paid a quarterly cash dividend of $0.2120 per share along with an interest payment of $0.2145 per $7.15 principal amount of the notes. Royal Bank of Canada underwrote the security.