Thesis: Emmis preferred shares are either worth nothing (if bankrupt) or they are worth $50 per share plus a decent interest rate. Unless I'm missing something, there isn't much in between. I know that the actual price until maturity would fluctuate due to risk and market interest rates, but if Emmis survives and restores their dividends (which they must do eventually if they survive), then the $50 value would ultimately be achieved. Questions: Is the above thesis true or are there factors other than bankruptcy that could change the potential value of EMMSP? If the thesis is true, wouldn't the risk reward ratio at this price a compelling buy (at least for spec money)? Put another way, is Emmis in such bad shape that it is a near certainty that they will go under or do they represent a good opportunity at 20:1 odds.
Something else interesting to note on cumulative preferred shares that are in non-payment - you should expect to get a 1099-OID for the value of the deferred dividend. The shares are now (in theory) worth that much more (since the dividend is accumulating), and the government will be expecting you to pay the taxes on that increased value "out of pocket". Essentially they're the same as a zero coupon note while they are in deferment. Doesn't apply of course in retirement accounts.
Thankfully, my EMMSP is in an IRA. I sold most of it anyway after the big run, but have just started buying back in at around 14. I'm guessing it will be cheaper in the morning. Do you see the Citadel news as being totally unrelated or a bad omen? Also, given that the unpaid dividends will probably accrue over multiple tax years, who gets dinged with the 1099-OID and for what amount of back dividends? For example, if I sold prior to the end of the tax year (which I did) does the current holder owe for all accrued dividends for the year or are they prorated based on when you held? It seems like it would be painfully difficult and expensive to track this and issue correct 1099’s. I know it’s not important for my specific investment as I’m in an IRA, but I’m just trying to understand the concept in general. I’m also grateful that you’ve taken the time to share what you’ve already written. Thanks.
You're seeing a few factors at work on the preferred price. A cumulative preferred that goes into non-payment is treated as an original issue discount security for tax purposes, like a zero coupon. Anyone holding EMMSP at year end, assuming they still aren't paying, should expect to get a 1099-OID for 3.25 a share. That accumulated value is taxable in the year it accumulates, and once you pay that tax you add the 3.25 to your cost basis. If they then go under you can report the higher basis as your loss, but you don't get your taxes back. So there is a real cost associated with holding this even beyond the risk of default, even at 15% you'll be hit with 50 cents a share in taxes out of pocket.