Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Wednesday, March 12, 2008: Dumb
me. I forgot to change the date on yesterday's column. As a result, you may
have missed it. It contained all the good news from Eaton Vance. Click
The Eaton Vance
news caused Wall Street phone lines to to buzz with rumors of possible early
redemptions by others, including Nuveen. And sure enough, at 7:30 AM this morning,
the following came over Business Wire (a way corporations release news).
Note today's conference call. Call in 15 minutes early. The call will be`packed.
Seeks to Refinance Auction-Rate Preferred Stock Issued by Nuveens Closed-End
to Reduce the Funds Cost of Leverage and Restore Liquidity for Preferred
WIRE)--Nuveen Investments, Inc., a leading provider of diversified investment
services to institutional and high-net-worth investors, today announced that
it is seeking to restructure the leverage of the 100 Nuveen closed-end funds
that have issued auction-rate preferred stock (ARPS).
Nuveen has arranged
new debt financing to refinance a substantial portion of its taxable funds
ARPS and is in discussions with market participants regarding additional financing.
By the end of March, Nuveen intends to begin announcing ARPS refinancings
for specific taxable funds, subject to necessary approvals.
the uncertainty that our closed-end fund shareholders have faced as a result
of the unprecedented auction-rate market failures of the past several weeks,
said John Amboian, CEO of Nuveen Investments. We are seeking to do two
things: first, reduce the relative cost of leverage which has increased
due to this historic turmoil in the auction-rate market by replacing
ARPS with various forms of debt and other leverage, including potentially
a new form of preferred stock; and second, restore liquidity at par for auction-rate
Nuveen is reviewing
alternative methods for refinancing the ARPS with the Nuveen funds board
on a continuing basis, and the board is fully supportive of Nuveens
efforts on behalf of common and preferred shareholders.
will be subject to significant implementation risk, as its success will depend
on market and economic factors beyond our control, said Amboian. However,
we believe it is important for common and preferred shareholders to understand
our thought process, as well as the nature of the actions we are seeking to
take and the potential time frames involved.
the ARPS is Necessary to Reduce Relative Cost of Leverage
that the funds ARPS, as presently structured, will likely continue experiencing
failed auctions, as market participants have lost confidence in the auction
process to provide short-term liquidity. Nuveen believes, however, that at
current short-term interest rates, leverage continues to offer the potential
to enhance returns for common shareholders.
that it is in the best interest of our common and preferred shareholders to
begin as quickly and prudently as possible to refinance the funds ARPS,
said Bill Adams, Executive Vice President, Nuveen Investments. Our primary
goal is to reduce the funds current relative costs of leverage, bringing
those costs more in line with historical norms and providing liquidity for
120 closed-end funds of which 100 are leveraged and have a total of $15.4
billion in ARPS outstanding. Of these 100 leveraged funds, 13 are taxable
funds that invest in equities, government and corporate debt, or combinations
and have $4.3 billion of ARPS outstanding, and 87 are municipal bond funds
that invest in municipal bonds and have $11.1 billion in ARPS outstanding.
Form of Preferred Stock
Nuveen has been
working with its banking partners to develop a new form of preferred stock
that includes a put feature (Variable Rate Demand Preferred or VRDP), making
it eligible for purchase by taxable and tax-exempt money market funds. While
Nuveen believes that it will be able to address the principal legal and regulatory
issues regarding VRDP issuance, the feasibility of refinancing the funds
ARPS with VRDP is still contingent on finding third parties willing to provide
put commitments at a reasonable cost, on the willingness of money market funds
and other investors to purchase VRDP, and on other factors.
a new financial instrument, said Adams. Until one or more of our
funds successfully issues VRDP, we cannot be certain that VRDP will be a viable
form of financing for our funds.
the Taxable Funds ARPS
to refinance the taxable fund ARPS with more conventional forms of debt leverage,
and has arranged new debt financing to refinance a substantial portion of
its taxable fund ARPS.
Nuveens taxable funds already employ debt leverage such as commercial
paper and bank borrowings to complement ARPS, said Adams. There
are no regulatory impediments to replacing a substantial portion of the ARPS
issued by Nuveens taxable funds with some form of debt leverage.
become a viable source of financing, VRDP may be used in the future to replace
some or all the taxable funds debt leverage depending on each funds
portfolio composition and investment objectives.
that it will announce refinancing of some ARPS issued by its taxable funds
by the end of March, and will seek to complete the refinancing of all the
taxable funds ARPS within four to six months depending on market conditions.
Nuveen cannot assure investors that it will obtain the financing necessary
to redeem all outstanding taxable fund ARPS or that, if the financing is obtained,
it will be able to complete the refinancings in a timely manner.
the Municipal Bond Funds ARPS
that the best solution for the municipal bond funds would be to refinance
the ARPS with VRDP. Nuveen is in active discussions with market participants
that could provide put commitments for the VRDP. If Nuveen is successful in
obtaining put commitments, its goal would be to begin refinancing some of
the municipal bond fund ARPS within two to three months. However, Nuveen expects
that it will take considerably longer to refinance all of the Nuveen municipal
bond funds ARPS given the large number of funds involved and the significant
amount of ARPS they have outstanding.
Until one or
more municipal bond funds are successful in issuing VRDP, it will not be possible
to determine whether VRDP can be used to refinance all or a significant portion
of the ARPS or in what time frame the refinancings could be completed.
bond funds may consider using debt leverage temporarily to refinance a portion
of their ARPS if the cost of debt leverage can enhance common shareholders
returns. This could occur if the Federal Reserve continues to reduce the Federal
Funds Rate and the cost of short-term debt leverage continues to decline.
Debt leverage is generally a less advantageous form of leverage for the municipal
bond funds than leverage achieved through issuing preferred stock. This is
because dividends on preferred stock are tax-exempt to the holder while interest
on debt leverage is taxable.
may refinance a portion of the ARPS by creating tender option bonds (TOBs)
from certain municipal bond funds portfolios. TOBs are derivative securities
created from fixed-rate bonds through a trust arrangement that effectively
creates financial leverage within a bond portfolio. TOBs have a put-like feature
that makes them eligible for money market funds to purchase. The municipal
bond funds ability to create TOBs to refinance ARPS will be limited
due to the availability of eligible municipal bonds from which to create TOBs
as well as other factors.
implement the refinancing of the ARPS on a fund-by-fund basis and will provide
periodic updates to shareholders and market participants via press releases
and on its Web site at www.nuveen.com/arps.
The timing of any funds refinancing will depend on a variety of factors,
including final fund-by-fund board approval, the nature of each funds
portfolio, its current leverage structure, the cost of financing arrangements,
the feasibility of the VRDP structure, and the ability to obtain sufficient
credit capacity, among other factors. No assurance can be given that any of
the funds will be able to successfully refinance the ARPS in the stated time
frame. A change in market conditions could delay or impair the funds
ability to refinance some or all of their ARPS.
from market factors, the ability to achieve our goals will depend on the support
of the major broker-dealer firms and other financial institutions that participate
in the ARPS market, said Adams. We have been working closely with
them. Our efforts remain focused on finding the best solution for our common
and preferred shareholders.
will host a conference call at 10:00 a.m. Central time on March 12, 2008,
to discuss the refinancing of the funds ARPS. Nuveen anticipates high
call volume and encourages attendees to access the call via the live streaming
audio link to facilitate the registration process. Online participants will
be able to submit questions. Attendees can access the teleconference on Nuveens
Web site, www.nuveen.com, or at http://w.on24.com/r.htm?e=105775&s=1&k=68694868A5B290FE248355A2D480F2A3.
(Due to its length, this URL may need to be copied/pasted into your Internet
browser's address field. Remove the extra space if one exists.) Attendees
who prefer to participate by phone can access the call by dialing (888)
603-6873 or (212) 729-5019 and referencing conference ID number
A replay of
the call will be available beginning shortly following the call through March
26, 2008. To access the replay, please dial (800) 642-1687 or (706)
645-9291, conference ID number 38446231, or visit the closed-end
fund section of the companys website at www.nuveen.com/cef. Call information
and updates will be posted on Nuveens new auction-rate preferred resource
center at www.nuveen.com/arps.
provides high-quality investment services designed to help secure the long-term
goals of institutions and high-net-worth investors as well as the consultants
and financial advisors who serve them. Nuveen Investments markets its growing
range of specialized investment solutions under the high-quality brands of
NWQ, Nuveen, Santa Barbara, Tradewinds, Rittenhouse and Symphony. In total,
the Company manages $164 billion in assets as of December 31, 2007.
big bounce in stockmarkets: The Fed's announcement of a $200 billion
capital injection into the banking system caused a huge 3.6% jump in the Dow,
which was (I think) more a reaction to an oversold market and short-covering
than any real feeling the Fed's money would do much long-term good. Fact is
many commercial and investment banks are still riddled with lousy, worthless
assets. They need to be worked through before some degree of long-term stability
can be achieved. I do see some hope that some of these monies may eventually
work themselves through to redeeming auction rate preferreds. But ARPs redemption
was not the Fed's objective.
And while yesterday's
bounce in stockmarkets was nice, I am convinced, it is not the beginning
of a bull market. There are simply too many dreary economic happenings (including
recession and lower corporate earnings -- no need to list them all) that will
continue to depress stockmarkets. What should an investor do? My strategy is
cash, commodities, mining stocks and strong currencies (like the Canadian and
Australian dollar and the Euro. Below is an interesting analysis by Donald Coxe.
think you have it bad Auction Rate Preferreds? Read this mess, as
reported recently in The
Star Ledger, a New Jersey newspaper:
shipping tycoons caught in a financial storm
Mortgage crisis turns sale of shipping terminal into $286 million disaster
four decades running one of the nation's busiest shipping terminals, Brian
Maher made plenty of investments.
But his biggest
gamble may turn out to be the one made on his behalf by Lehman Brothers, the
venerable Wall Street investment firm.
In July, Maher
and his brother hired Lehman to oversee $600 million, a portion of what they
made on the sale of their family's business at Port Elizabeth. Now, seven
months later, $286 million of the money is tied up in securities that have
plunged in value. The Mahers cannot get to their money and, worse, it may
be lost forever.
The Mahers claim
in an arbitration filing that Lehman ignored their instructions and put a
large portion of the money in risky debt securities just as the market was
beginning to crumble.
my experience that when reputable organizations reach an understanding they
honor it," Brian Maher wrote in an e-mailed response to questions last
week. "Lehman not only violated that understanding, but they did so with
two-thirds of the money they were to invest. They betrayed the trust we put
in them and their reputation as a responsible Wall Street bank."
the Mahers' allegations, and the two sides are likely to spend the coming
year battling it out before a panel of arbitrators.
clients had a professional investment adviser with whom we dealt," Lehman's
spokesman Randall Whitestone said in a statement. "We believe we have
meritorious defenses to this claim."
to the Maher brothers is a story about the times.
As the credit
market began to collapse last summer, investors, big and small, got caught
in a costly vortex created by a panic not seen on Wall Street since the bursting
of the Internet bubble in 2000. Many investors, including some major institutions,
had little knowledge of the incredible risk they faced with sophisticated
debt securities. Ultimately, the Mahers story puts a human face on a credit
crunch that continues to ripple through the economy.
horrible situation," said Ric Marshall, chief analyst at the Corporate
Library, a research firm specializing in corporate governance. "It exemplifies
the kinds of complex relationships and credit instruments that these banks
have gotten into and why the economy is in trouble.
part of the same big mess."
61, began working at his father's shipping terminal the same year President
Richard Nixon started his first term in the White House. Over time, he and
his younger brother Basil, 56, built Maher Terminal into one of the most important
seaport hubs in the nation.
Last year, 1.4
million containers filled with everything from German beer to blue jeans made
in China moved through Maher Terminal. The goods were transferred from ships,
loaded onto thousands of trucks and then transported to distribution centers
and retailers across the Northeast.
In the close-knit
port community, the Mahers were leaders. Brian Maher, tall and reserved, played
a prominent role in labor negotiations. The Short Hills resident also introduced
pioneering technology to move cargo through the port more efficiently and
helped to mediate heated dredging controversies.
a resident of Chatham who shares his brother's modest style and penchant for
privacy, provided a voice for the shipping industry on the national association
of waterfront employers. After the 9/11 terrorist attacks, he testified before
Congress and was named to a Department of Homeland Security advisory committee
to improve protection of the ports.
By 2007, the
Mahers operated the last family-owned port terminal in the U.S. Its biggest
rivals were international conglomerates with deeper pockets of money to spend
on technology and facilities. And with trade levels soaring, port terminals
were now hot real estate investments.
backdrop, the brothers announced in July an agreement to sell the 445-acre
family business to a subsidiary of Deutsche Bank, a titan of Germany's financial
services industry. The sale price was never publicly disclosed.
of the deal provided a glimpse into the character of the men who sold the
business: The Mahers distributed a portion of the proceeds, "sharing
bonuses" to each of their 246 employees.
The story of
what happened next is based on filings with the Financial Industry Regulatory
Authority, the largest non-government regulator of Wall Street brokerage firms,
and conversations with individuals familiar with the situation.
Like a lawsuit,
the claim represents only one side of the story. Lehman is expected to file
its response to the claim next month.
When the sale
of their business appeared imminent, the Mahers turned to John Liu, an investment
banker who helped with the transaction, for some guidance. Liu, co-head of
U.S. mergers and acquisitions and chief financial officer at Greenhill &
Co., helped them to choose two investment firms and a basic investment strategy.
Liu said yesterday
he was trying to help the Mahers by referring them to Lehman and it turned
out to be "disappointing." He declined further comment.
The Mahers emphasized
to Lehman they wanted their investments to be in short term, tax-exempt municipal
bonds or similar securities. Eventually, they put $600 million into a Lehman
account, while a separate undisclosed amount of proceeds from the sale went
into a similar account with UBS.
The Mahers said
in their complaint that UBS followed their instructions.
In some ways,
the Mahers were like lottery winners who suddenly receive a windfall. The
money could not simply be deposited in the bank; it had to be invested and
managed. Yet, the Mahers had not really mapped their plans for the future,
except to create a corporation known as Essex Equity.
Equity was set up to provide Basil and me with a platform to organize our
affairs and from which we could explore opportunities," Brian Maher said
in an e-mail. "We had no specific investment plan at the time of the
The Mahers claim
Lehman's money managers were negligent and violated federal securities regulations
when they placed more than half of the $600 million in so-called auction rate
securities allegedly tied to two now-troubled bond insurance companies, MBIA
and Ambac Financial.
of the dispute, experts said, may hinge on whether the Mahers can prove the
choice of investments was a deliberate attempt by Lehman Brothers to dump
securities on an unwitting client as the sub-prime mortgage crisis boiled
over last summer.
For years, auction-rate
securities were considered good investments for institutions and wealthy individuals
who wanted to park their money for a short time and still earn an attractive
interest rate. They were seen as alternatives to money market funds and short-term
They were also
securities are debt instruments -- issued by entities such as municipalities,
hospitals and housing finance agencies, as a way of generating money. While
they are rated as long-term bonds, they are sold as short-term securities
at periodic auctions, hence their name.
occur as frequently as every seven days when the interest rate is reset. Every
time an auction is held, investors are able to pull out their original investment
plus interest as other buyers replace them.
While the high
yield and ability to access the money are benefits, the single biggest risk
is that an auction will fail -- that there won't be buyers to replace the
original ones. When that happens, the value of the security can plunge. But
it's so rare as to be almost inconceivable.
That's why no
one was prepared for what happened last summer when subprime mortgage market
The lion's share
of the Mahers money, according to the claim, was invested in auction-rate
securities tied to the bond insurers MBIA and Ambac Financial.
write policies ensuring lenders will be reimbursed if the borrower can't pay
back the money, and they play a critical role in the debt market. State governments,
for instance, cannot raise money by selling bonds without insurance.
But over the
last few years, the insurers entered into riskier investments such as subprime
mortgage securities. Now, they're under fire from debt rating agencies, who
fear they don't have the cash to cover claims.
In early August,
the Mahers claim Lehman used nearly $168 million of their money to buy auction-rate
securities despite an earlier failed auction, which prevented a set of similar
corporate securities from being sold, according to the Mahers claim.
14, Lehman tried to sell a security held by the Mahers. That auction also
failed. Four days later, the Mahers allege Lehman reinvested more than $57
million despite three more failed auctions.
to comment on specific allegations.
By late August,
roughly a month after the account was opened, John Liu, the Mahers advisor-friend,
received a monthly portfolio statement from Lehman detailing some of the investments.
In two e-mails to Will Gourd, one of Lehman's money managers, Liu complained
about the firm's choices.
In the claim,
the Mahers said Lehman liquidated a small portion of securities in their portfolio,
but "either did not or could not liquidate a majority of them, as the
auctions associated with them failed and continue to fail."
At least one of the securities that could not be sold, dubbed Double Oak Trust
Series 2007-1, was insured by MBIA.
What that means
for the Mahers is this: $286 million remains tied up in securities that cannot
be sold because no one wants to buy them. But what's worse, no one is certain
what the securities will be worth once the credit crisis passes.
firms require investors to sign an agreement saying they will arbitrate any
problems. So, it will be left to the arbitrators to decide whether Lehman
did something wrong or whether the Mahers were swept up in a set of circumstances
that turned what would be an ordinarily safe bet into a bad one.
Lehman is going to tell a different story," said Thel, the Fordham professor,
before adding, "If the facts are as they allege, they (the Mahers) have
a substantial chance of prevailing."
a finance professor at Columbia's Graduate School of Business, said arbitrators
will take into account what was promised by Lehman and the sophistication
of the Mahers.
be sophisticated businessmen, but that does not always translate to sophistication
about investments," he said. "It will depend on a whole set of factors
that are impossible for us to see as outsiders."
on the Big Picture Outlook: Donald Coxe, Global Portfolio Strategist
of BMO Financial Group, is one of a select group of analysts that have been
remarkably right on the big picture outlook for some years. These
points come from a web site called (of all things) Investment
Postcards from Cape Town -- that's South Africa. I like what Coxe
here for Coxe's most recent webcast, dealing with the case for commodities
and resources stocks.
investors should remain heavily overweight commodity stocks, including the
base-metal stocks. As the bear market grinds on, use days of stock market
weakness to add to commodity stock exposure. They not only remain the asset
class with the best earnings outlook, but also the asset class that is least
understood by conventional asset allocators, who still see them as cyclicals
dependent on OECD growth.
2. In the near
term, the golds will continue to outperform stock markets and to act as a
form of hedge against two kinds of shocks financial panics and inflation
3. Remain heavily
underweight bank stocks, and financials tied to Jurassic Park Avenue
excesses. Within the financial group, overweight high-quality fire and casualty
companies, life insurers, and asset management organizations.
4 Retain above-average
cash positions, preferably in strong currencies.
5. Where possible,
borrow in dollars and invest in assets denominated in strong currencies.
6. The Canadian
dollar remains the Western currency with the best fundamentals. Canadas
problems arise because the Great Lakes are an insufficient barrier to the
flow of bad economic and financial trends from the South.
7. Within the
commodity groups, continue to emphasize investment in companies with long-duration
unhedged reserves in the ground in politically secure regions.
8. The growth
of sovereign control of energy assets means that the supply-side response
to record-high oil prices will probably be inadequate to meet relentlessly
growing global demand. Too many Third World governments with rich oil reserves
have too many other demands for cash to reinvest heavily for the long term
in new production. Retain exposure to the shares of producing Alberta Oil
Sands companies with reserves that could outlast this century.
investors should use any temporary pullback in base metal producers to build
their portfolios for the Final Movement of the Sonata which will be
the longest and loveliest performance of metal music in history.
10. The Treasury
yield curve is now in recession mode low yielding and upward sloping.
It is of investment merit only for those who expect a long, deep recession.
The Ten-Year note, with a negative real yield of 50 basis points, should appeal
only to those who believe the recession will be accompanied by deep deflation.
Oddly enough, credit spreads, though they have widened from their record-low
levels, do not discount any recession at all.
We think bond
investors should go for short- and medium-term high-quality non-Treasury paper
preferably in currencies other than greenbacks.
stocks remain attractive, even if Democrats win it all in November. The next
president may well choose to speak more softly than the incumbent, but if
he or she doesnt carry a big stick, the jihadists wont listen.
to retire to Alaska?
been in the liquor business for 25 years.
Finally sick of
the stress, he quits his job and buys 50 acres of land in Alaska as far from
humanity as possible.
He sees the postman
once a week and gets groceries once a month. Otherwise it's total peace and
After six months
or so of almost total isolation, there's a knock on on his door.
He opens it and
a huge, bearded, unwashed man is standing there.
Name's Lars, your
neighbor from forty miles up the road. Having a Christmas party Friday night.
Thought you might like to come. About 5:00.'
Tom, 'After six months out here I'm ready to meet some local folks. Thank you.'
As Lars is leaving,
he stops. 'Gotta warn you, gonna be some drinkin.'
Not a problem,'
says Tom. 'After 25 years in the business, I can drink with the best of 'em.'
Again, the big
man starts to leave and stops. 'More 'n likely gonna be some fightin' too.'
'Well, I get along
with people, I'll be all right. I'll be there. Thanks again.'
'More 'n likely
gonna be some wild sex, too.'
'Now that's really
not a problem,' says Tom, warming to the idea. 'I've been all alone for six
months! I'll definitely be there. What should I wear?'
'Don't much matter.
Just gonna be the two of us.'
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
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