Monthly income preferred stock

Monthly income preferred stock or MIPS is a hybrid security created by Eli Jacobson,^[1] a Sullivan & Cromwell tax partner, and introduced to the market by Goldman Sachs in 1993.^[2] In essence, MIPS is a combination of deeply subordinated debt and preferred stock.

MIPS is structured in such a way as to make payments on the security an interest expense for the borrower and dividend for the lender. A special purpose entity of the issuer sells the preferred stock to the public and then lends the proceeds to the parent. The parent's interest payments to the subsidiary are tax-deductible as interest and are used by the SPE to pay preferred dividends to the investors.^[3] However, the interest income received by the SPE is not taxable income, because it is organized as a tax-free entity.

Because of these features, MIPS at one point dominated the market for traditional perpetual preferred equity, accounting for over 70% of all new preferred issues.^[4] However, MIPS as a tax shelter no longer works. The credit rating agencies consider MIPS to be preferred stock.