Why do companies issue preferred equity in the first place?

In practice, preferred equity is more similar to debt because it earns a fixed yield. However, it is technically classified as equity by the banks, so issuing preferred equity is a way to gain access to a debt-like instrument without hurting the company’s debt-to-equity ratio.

It also offers maximum flexibility compared to debt. Missing out on a preferred share dividend payout will not trigger a default, whereas missing an interest payment would.

That benig said, if a company does not pay a dividend to preferred shareholders, it also is not allowed to pay a dividend to common shareholders, as preferred shares have preference rights over common shareholders.