Moody’s Investors Service warns that it will likely downgrade firms that look to turn themselves into the U.S. versions of income trusts.

Such conversions have proven to be popular with Canadian companies and investors since their introduction in the 1990s. Income trusts represent more than $90 billion in market capitalization in Canada, where they were introduced in the 1990s.

The rating agency explains that Wall Street’s controversial new Income Security Recapitalizations incorporate a number of additional structural risks over the version used in Canada. In the U.S., these structures combine common equity and high yield subordinated debt into a package that pays both dividend and interest to investors. The Canadian instruments are also designed to provide a stable income stream to investors, but do so through trust distributions that don’t grant holders the same creditor rights as in the U.S., it says.

Canadian income funds are based on the same economic principles as the U.S. income security structures, but differences in corporate taxation between the two countries allow for a less complicated legal structure in Canada, says Moody’s.

This, combined with differences in market structure, translate into potentially lower risk profiles in the Canadian market. Specifically, the Canadian income funds are structured as trust units. “The distribution of these units does not represent interest and failure to pay does not give the holder acceleration rights — unlike the subordinated debt component of a U.S. unit,” says Andrew Kriegler, a Moody’s analyst and author of the report.

“The units feature neither a maturity date nor any enforceable right to cash flow. As a result, unlike in the U.S., the Canadian structures don’t embed any refinancing risk at the unit-holder level nor can a failure to pay the expected distributions cause a default. The position of senior lenders in a Canadian structure is relatively better as a result,” says Kriegler.

However, any structure that that pays out virtually 100% of free cash flow to investors still puts pressure on the credit quality of the issuer. The use of all that cash is Moody’s chief worry with these products.

Ultimately, says Kriegler, income securities put negative pressure on the credit quality of the companies that adopt them.

In the absence of meaningful measures to support the credit quality of the company, Moody’s says it will likely reduce ratings as the result of an income security recapitalization. For the majority of speculative grade income security issuers, the most likely outcome of such arecapitalization would be a reduction in the company’s ratings by a single rating notch, according to the report.