[at5]

Have to disagree. They're still preferred equity instruments with unique trigger provisions. Higher up in the capital structure but not debt; you can't credit bid using these instruments in a Chapter 11 scenario and they aren't afforded the same protections in bankruptcy court. What attracts investors to debt instruments are the interest payments. You'd prefer PIK (payment in kind) interest on debt as opposed to cash payments in a low interest rate environment but that doesn't translate to pref equity instruments.

The unique feature of debt vs equity is that debt has a concave investment profile; you know exactly what you should be getting upon maturity (principal + interest payments). Equity has a convex investment profile; you get the residual value after subtracting face value of debt from the enterprise value.

[roymurdock]

Great points.

I think the confusion is due to the fact that debt can (and will) be restructured in a downturn, just as equity will lose value. So they're both risky when you make a poor investment.

But, as you note, debt and equity both have distinct risk and payoff profiles that are determined by law.