What Are Public Income Notes?

An unsecured, unsubordinated debenture issued by a public company. PINES are a type of exchange-traded note that trade on a stock exchange but also bear interest. PINES are also a type of preferred security and fall into the same category as quarterly income preferred securities (QUIPS), monthly income preferred securities (MIPS), trust certificates, and trust preferred securities. Two examples of companies that issue PINES are GMAC Mortgage and General Electric Capital; the notes trade on the New York Stock Exchange under the ticker symbols GMA and GEA, respectively.

Understanding Public Income Notes (PINES)

Because PINES are unsubordinated (also called senior debt), they have precedence over other loans or securities in the event that the issuing company should default. This means that an investor holding PINES faces less default risk than with subordinated debt (also called junior debt) because holders of unsubordinated debt are at the front of the line to be repaid. However, because PINES are unsecured, they are not backed by any of the firm's assets, which makes them riskier for investors than secured investments. PINES also have advantages to their issuers, including the tax deductibility of interest payments.

PINES are typically sold to the general public in small share amounts, such as $25 or less per unit. The fixed specified quarterly interest payments attached to these instruments are redeemable at a value of par plus accrued interest at the option of the company after a specified period, usually five years.

PINES trade flat on the markets, meaning that the price does not include any accrued interest that isn’t included in the trading price. PINES typically rank equally with a company's other senior unsecured and unsubordinated debt and that rank senior to the preferred securities of the company.

Unlike MIPS and QUIPS

Although PINES are often lumped together with MIPS and QUIPS, there are some key differences. QUIPS are hybrid, preferred-stock-like securities issued by a special purpose foreign or domestic LLC, which is usually a wholly owned subsidiary of a U.S. parent corporation. The LLC loans the proceeds to the parent, which uses the money to pay quarterly dividends to QUIPS holders. And because the LLC is a partnership, the full amount of the interest payments has to flow through to the QUIPS holders.

MIPS, which usually offer higher yields than other alternative investments, have the advantage of providing tax-related savings without raising the corporation’s debt ratio, which has consequently rendered them one of the more popular hybrid securities.