When a corporation issues preferred shares rather than debt, it avoids increasing its leverage (debt-
to-equity ratio). Preferred shares are considered equity for financial reporting purposes and do not
require the repayment of principal like debt instruments. Although they may have fixed dividend
obligations, these are not legally binding in the way interest payments on debt are.
Issuing preferred shares allows the corporation to strengthen its balance sheet while potentially
preserving its credit rating. Preferred shares do not directly affect leverage but provide capital
without increasing debt.
Reference:
Volume 1, Chapter 8: Preferred Shares, section on "Why Companies Issue Preferred Shares" explains
the advantages of using preferred shares instead of debt.
