RE: RE: RE: RE: RE: RE: RE: RE: RE: MTN question
"So is it reasonable to say that Pref. A and B are included in the debt/EBITDA formula as they always had an redeem date and paid a divy . and prefs. are generally lumped in with liabilities?"
No Birdie, preferred shares are not debt. That is why they are separate line item under Liabilities.With preferred shares you have made a purchase of Equity in the company. That purchase typically is not perpetual, and therefore usually has provisions where the company can buy it back or exchange it for another form of company equity That is why it has a Liability overhang to it. The company has committed to make a conditional purchase in the future, which in no way can be interpreted as the same thing as a repayment of a loan. If you hit someone with your car without having insurance then that too would create a financial obligation or liability but in no way would anyone say that T-boning a car and putting them in the ICU created a loan between you two. A loan is purely a contractual debt obligation. The Creditor has not received goods in exchange for money.
To take it one step further, dividends are not the same as interest. Dividends are a profit sharing feature of your purchase of company equity. That is why it can be modified or suspended in most cases at the company's discretion. Interest on the other hand is part of the contractual debt obligation of the loan, and if not paid then the contract has been breached and entitles the creditor to start legal proceedings to recover their money. If the company did not pay the interest because they were not financial able to do so, then that would catapult them into creditor protection such as CCAA or BIA in Canada, and the near equivalent Chapter 7 or Chapter 11 Bankruptcy in the US. Such action would not require the permission of the company or its shareholders. It can, and is, enacted autonomously by the injured party(s).
To add a scoop of ice cream to that apple pie, If you have ever received a dividend from a domestic corporation or received interest from a public loan then you also know that CRA treats them as 2 completely different types of gains for taxation purposes on a personal tax return. Interest is part of the cost of running a business and therefore reduces the gross earnings of the corporation and therefore the taxes associated with it (it is the "I" in EBITDA). That is why they are 100% taxable to the creditor that receives the payment. Dividends on the other hand are profit sharing so they are paid from the after tax profit of your company. They have a much lighter tax component to them because your company has already paid tax on that dividend that your received. Dividend from a foreign corporation are not treated the same way because the taxes the corporation paid on those dividends were paid to to the treasury of a different country.
Did that help or did I just send your brain into a frazzle?