Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Thursday, March 13, 2008: Latest
aucton rate securities news. From Bloomberg this morning:
SEC May Let
Borrowers Bid on Auction-Rate Securities (Update2)
March 12 (Bloomberg)
-- The U.S. Securities and Exchange Commission may let borrowers bid on their
own auction-rate securities amid a surge in failed auctions that have increased
debt costs for state and local governments.
The SEC is preparing
``guidance'' allowing borrowers to participate in auctions as long as they
disclose ``price and quantity'' information about their bids, Erik Sirri,
who heads the agency's trading and markets division, said in congressional
testimony today. The SEC expects to release the directive by the end of the
week, he said.
should remove any hesitancy on the part of broker dealers and auction agents
to allow municipal issuers to bid,'' Sirri told members of the House Financial
Services Committee in Washington.
downgrades of companies that insure the debt has scared off investors and
led bankers to stop buying unwanted securities, triggering failed auctions.
Rates on $100 million of Port Authority of New York and New Jersey bonds rose
to 20 percent on Feb. 13, from 4.3 percent a week earlier.
on auction-rate bonds are determined by bidding that typically occurs every
seven, 28 or 35 days. Brokers at Goldman Sachs Group Inc., Citigroup Inc.
and other banks began permitting failures last month amid concerns that potential
downgrades of MBIA Inc. and Ambac Financial Group Inc. would hurt the rankings
of bonds the companies insure.
From 1984 through
2006, only 13 auctions failed as brokers stepped in to buy the bonds when
demand was weak. The total value of bonds involved in recent failed auctions
may exceed $80 billion, Sirri said.
fail, bondholders are left holding the securities and interest rates reset
at a level spelled out in statements issued at the initial bond sale. Investors
can't sell the bonds until there is a successful auction.
the $330 billion municipal-debt market pay banks to issue auction bonds and
pay annual fees of 0.25 percent of the outstanding obligation to run the auctions
and remarket the debt. Banks are paid even when auctions fail.
Charles Schumer, a New York Democrat, last week joined a growing list of lawmakers
urging regulators to let borrowers bid on their own bonds. A Feb. 28 letter
from four members of the House Financial Services Committee, including chairman
Barney Frank, said it's ``urgent'' that regulators permit the bidding.
The SEC fined
Citigroup, Goldman and 13 other banks $13 million in May 2006 after alleging
they gave clients information about rival bids in the supposedly blind auctions.
want SEC assurance that allowing issuer bids wouldn't violate the terms of
that settlement, said Anne Phillips Ogilby, an attorney at Ropes & Gray
LLP in Boston. She wrote a letter to the SEC last month on behalf of California
and Massachusetts hospitals that want to bid on their own bonds to prevent
``does not prohibit broker-dealers from bidding for their proprietary accounts
when properly disclosed,'' Sirri said today.
show the widening impact of the bursting of the U.S. housing bubble, which
has caused rising defaults on home loans and threatened bond insurers that
guaranteed structured securities tied to mortgages. The subprime-mortgage
crisis has cost financial companies almost $190 billion in asset writedowns
and credit losses since the beginning of 2007.
The Bond Buyer this morning;
ARS Guidance by Friday
The Securities and Exchange Commission hopes to issue guidance by Friday that
will allow issuers to bid on their own auction-rate securities with "appropriate
disclosures and in compliance with certain other conditions," Erik Sirri,
the SEC's director of markets and trading, told members of the House Financial
Services Committee yesterday.
would be designed to clarify that ... municipal issuers can provide liquidity
to investors that want to sell their auction-rate securities without triggering
market manipulation concerns," Sirri said in testimony at a hearing on
the turmoil in the municipal market. "This may also have the secondary
effect of easing substantially the financial burden on municipal issuers and
conduit borrowers from unusually high interest rates. It also should facilitate
an orderly exit from this market by municipal issuers and conduit borrowers
who seek to do so."
guidance will require issuers and conduit borrowers that want to bid on their
bonds to disclose "certain facts related to price and quantity."
It will also instruct broker-dealers that they can accept such bids without
violating a 2006 enforcement settlement with the SEC over disclosure failures
in the auction-rate securities market.
comes as the commission has received several requests to consider ways to
assist issuers, Sirri said. Last month, the leadership of the committee asked
the SEC to clarify for the markets as quickly as possible that issuers can
participate in auctions for their own securities without running afoul of
the securities laws, provided such bidding is allowed by the bond documents.
The Securities Industry and Financial Markets Association and other market
participants have sent similar letters.
reporters at a break in the hearing, Sirri said that the SEC guidance does
not come in response to any particular letter. Commission officials, he said,
are responding to the auction-rate environment as they see it. He added that
the guidance will likely be disseminated through the broker-dealer community.
suggested that it is unlikely that the commission will alter its Rule 2a-7,
which currently restricts the types of securities that can be purchased by
money-market funds. To comply with the rule, money market funds are generally
limited to securities that have long-term ratings of double-A or higher. In
light of the downgrades to bond insurers, numerous market participants - including
some who testified yesterday - support altering the rule to allow to take
into account the different municipal and corporate rating scales.
notable that despite the current liquidity crisis, money market funds and
their sponsors have not asked the commission for any changes to the risk-limiting
conditions of Rule 2A-7, including the credit rating floor," Sirri said.
shareholders of closed-end funds have begun to contact the SEC for relief
from failed auctions, Sirri said. The guidance on auction-rate securities
that the commission is expected to issue later this week may not extend to
the closed-end funds, he said, adding: "The division of investment management
continues to assess request for guidance ... and to monitor the developments
in this area closely."
From a reader:
I just found Blogging Stocks. It is really good - lots of info and people
on it with ARPS ...SEC contacts etc. Click
comes this story of an ING fund redeemption:
to redeem $240 mln of preferred shares
BOSTON, March 12 (Reuters) - Dutch financial group ING said on Wednesday two
of its U.S. closed-end funds will redeem $240 million of auction-rate preferred
shares issued by them, extending the list of firms repurchasing these securities
that have been rendered illiquid by the credit crisis.
ING said in
a statement the redemptions of the preferred shares of the two real estate-focused
funds will be funded with existing cash and debt borrowings. The redemptions
account for 22 percent and 33 percent of the outstanding preferred shares
issued by these funds, it said.
rate on the debt is equal to or less than the current rates on the auction-rate
preferred shares," it said.
which issue a fixed number of common shares and trade like stocks on exchanges,
have for about two decades issued preferred shares in order to borrow and
boost their returns.
shares are traded at auctions but buyers have stayed away from these auctions
over the past month due to the credit crisis. Holders of these shares have
since been putting pressure on closed-end fund issuers to repurchase them.
been yielding to the pressure. Over the past week, Nuveen Investments, Eaton
Vance Corp and Aberdeen Asset Management have said they will redeem various
amounts of preferred shares they have issued.
You can read the
entire ING press release. Click here.
From Van Kampen comes this press release yesterday:
Holds Auction Rate Preferred Shares Conference Call
WIRE)--Van Kampen Funds Inc., a subsidiary of Van Kampen Investments Inc.
(Van Kampen), will hold a conference call on Friday, March 14,
2008 at 1:00 p.m. Eastern Time with Senior Management to discuss recent developments
in the auction rate securities markets affecting Van Kampen closed-end funds.
The call is
open to the general public. The U.S. domestic call-in number is (866) 837-9780.
As the Auction
Rate Preferred marketplace continues to experience unprecedented lack of liquidity,
Van Kampen is working with other market participants on finding ways to restore
liquidity to this market. Even though we cannot offer a timeline for a resolution
to the liquidity situation, Van Kampen will discuss the current status of
the ARPS market and potential solutions that the industry is considering with
financial advisors and their clients.
Van Kampen Asset
Management, the Funds investment adviser, is a wholly owned subsidiary
of Van Kampen. Van Kampen is one of the nations largest investment management
companies, with approximately $122 billion in assets under management or supervision,
as of December 31, 2007. With roots in money management dating back to 1927,
Van Kampen has helped nearly four generations of investors achieve their financial
goals. For more information, visit Van Kampens website at www.vankampen.com.
closed-end funds involves risk and it is possible to lose money on any closed-end
From today's Wall
Hits Madison Dearborn
Nuveen Funds Forced To Refinance Securities
When private-equity firm Madison Dearborn Partners LLC paid $6.3 billion to
buy Nuveen Investments last year, one key attraction was the investment company's
lucrative leveraged closed-end fund business.
But the credit
crunch has squeezed that business, making it more expensive for Nuveen to
borrow, which could lower profit and limit growth. Yesterday, Nuveen bowed
to pressure from investors and steadily rising interest rates on its funds'
debt and arranged to refinance "a substantial portion" of $4.3 billion
of so-called auction-rate securities issued by its funds.
While the entire
buyout industry has been hit by the credit crunch because funding to do deals
has dried up, Madison Dearborn is the latest buyout shop to be sideswiped
in an unexpected way. In recent weeks, private-equity firms Carlyle Group
and Kohlberg Kravis Roberts & Co. have each had a publicly traded affiliate
struggle with investments in debt securities.
It is unclear
what price Nuveen will pay to borrow that money, but without low borrowing
costs, the profits it makes for shareholders by adding leverage to its funds
could diminish. In a conference call, Nuveen officials said they were working
hard to resolve the auction-rate-securities problem as quickly as possible.
"Our primary goal is to reduce the funds' current relative costs of leverage,
bringing those costs more in line with historical norms," Bill Adams,
an executive vice president at Nuveen, said in a news release.
is also getting hit close to home. Both it and Nuveen are big players in Chicago's
tight-knit financial community, and Madison Dearborn went outside its standard
playbook to do the deal, which was the largest buyout of a money-management
Madison had bought small companies and removed obstacles to help them grow.
Nuveen was slightly different. It was financially sound, growing rapidly,
and regarded as well-managed. Last year, however, Madison started raising
a $10 billion fund, which would put it in the same league as bigger players
like Bain Capital and Providence Equity Partners.
represented a 20% premium for Nuveen shares. According to investment bank
Putnam Lovell, the Madison-led group of buyers paid 18 times trailing earnings
before interest, taxes, depreciation and amortization for Nuveen. The deal
was twice the norm for such a purchase by some estimates.
managed about $165 billion, including more than $50 billion in closed-end
funds and $20 billion in mutual funds. It is the biggest player in the U.S.
closed-end fund world, with 120 different bond and stock funds.
funds can be quite profitable, and are attractive to investors because their
managers use leverage to boost returns. To get low-priced debt, Nuveen and
others used auction-rate securities, which are long-term debt on which interest
auction-rate market seized up last month as part of the credit crunch. That
has resulted in funds operated by Nuveen and others paying higher rates. Yesterday,
Nuveen said it had secured new financing to redeem some of its auction-rate
securities. Nuveen didn't specify the cost of the new financing.
other fund operators, Eaton Vance Corp. and Aberdeen Asset Management, announced
similar measures to redeem some auction-rate securities.
Even if Nuveen
redeems the entire $4.3 billion, its problems in the auction-rate market are
far from over. It has another $11 billion in these securities outstanding
for its municipal-bond funds, and Nuveen expects it will "take considerably
longer to refinance" them.
Service recently changed the credit-rating outlook on Nuveen to "negative"
from "stable" amid such challenges. In changing its outlook on Nuveen,
Moody's considered risks like the potential for permanent loss of assets under
management and earnings due to a need to retire or replace auction securities,
as well as negative net flows across stock products.
Madison is hoping
that Nuveen's problems in closed-end funds won't significantly affect the
fund company's bottom line, and has plenty of other portfolio companies to
buffer the private-equity firm should such troubles emerge. Nuveen units Tradewinds
Global Investors LLC and NWQ Investment Management, which manage other investment
products, have meanwhile had strong performances.
Still, the problems
could make it challenging to launch new products, especially in closed-end
funds, and may take management attention away from other strategic options
for now, like potential acquisitions.
Nuveen is likely
"not going to grow" much this year, says Moody's analyst Matthew
Noll. That could mean "the hurdles Nuveen must jump over to achieve the
valuation that Madison wants" if they decide to eventually sell could
be higher, he says.
For its part,
Nuveen stayed upbeat. "At times when the market is challenging, it's
most important" to have the long-term view that Madison Dearborn has
provided, said Alan Berkshire, senior executive vice president at Nuveen,
in an interview.
From Gabelli comes
this press release:
Convertible and Income Securities Fund Inc. to Redeem Auction Rate Preferred
RYE, N.Y.--(BUSINESS WIRE)--The Board of Directors of The Gabelli Convertible
and Income Securities Fund Inc. (NYSE:GCV) has authorized the filing of a
shelf registration of up to $100 million in preferred stock or debt securities.
The registration process typically takes approximately one to two months.
Upon its completion the Fund will have additional flexibility to take steps
toward resolving the illiquidity that has occurred for holders of the Fund's
auction rate preferred stock.
The Board of
Directors has agreed in principle to the redemption of the Fund's auction
rate preferred stock once the shelf registration is declared effective.
The Fund currently
has approximately $50 million of preferred stock outstanding, $25 million
of which is auction rate preferred stock.
This press release
does not constitute an offer of any securities for sale.
Convertible and Income Securities Fund Inc. is a diversified, closed-end management
investment company with $144 million in total assets whose primary investment
objective is to seek a high level of total return through a combination of
current income and capital appreciation. The Fund is managed by Gabelli Funds,
LLC, a subsidiary of GAMCO Investors, Inc. (NYSE:GBL), which is a publicly
traded NYSE listed company.
Dow Jones news service:
UPDATE: Nuveen To Refinance Some Auction-Rate Preferreds
By Daisy Maxey
Nuveen Investments Inc., joining the small group of fund managers that is
bringing new hope to at least some holders of auction-rate preferred securities,
said Wednesday it has arranged new debt financing for a portion of its taxable
closed-end funds' preferred shares.
However, Nuveen has not yet come to a solution for preferred shareholders
of its municipal closed-end bond funds, though it said it's aggressively pursuing
solutions, including a new form of preferred stock that could be purchased
by money-market funds. Preferred shareholders in muni funds far outnumber
shareholders in taxable funds at Nuveen and in the industry.
Chicago asset manager said it intends to begin announcing refinancings for
auction-rate preferred shares for specific taxable funds by the end of March.
It will replace the current leverage with various forms of debt and other
The firm said it plans to restore liquidity at par for preferred shareholders
and is seeking to reduce the relative cost of leverage for its common shareholders
has lined up financing arrangements "for a substantial portion"
of its taxable funds, Bill Adams, executive vice president of Nuveen's closed-end
fund team, said in an interview Wednesday. Adams couldn't say how many funds
for which the company has lined up financing, but said "the intent is
to refinance all" of the auction-rate preferreds for its taxable and
municipal closed-end funds, though it will start with its taxable funds first.
100 of Nuveen's 120 closed-end funds are leveraged with $15.4 billion in auction-rate
preferred shares outstanding. Of those 100 funds, 13 are taxable funds with
$4.3 billion in auction-rate preferred shares outstanding, and 87 are municipal
bond funds with $11.1 billion in outstanding auction-rate preferreds.
company hopes to announce specific taxable funds for which the preferred shares
will be refinanced over the next few weeks, and to have that process completed
within four to six months, depending on market conditions, Adams said. It
will use strategies like having the funds issue commercial paper or borrow
directly from banks, something its taxable funds already do, he said.
a matter of going to the financial institutions and getting capacity in terms
of the amount of lending that they're willing to do with various funds...,"
announcement is tangible proof of just how seriously the industry is taking
this issue, said Cecilia Gondor, executive vice president of Thomas J. Herzfeld
Advisors, a closed-end fund specialist. "Fund groups mobilized early
to tackle this crisis and have left no stone unturned..."
recent months, investors in auction-rate securities, preferred stock or debt
instruments with rates that are periodically reset at auction, have found
themselves trapped in the investments, which many had viewed as cash alternatives.
These securities are issued by municipalities and other tax-exempt institutions
in addition to closed-end funds. When the auctions failed, investors were
unable to sell the shares, but were paid a higher, penalty rate of interest.
funds have issued more than $60 billion in auction-rate preferred securities.
Investors in these preferred shares are particularly hard hit because while
interest rates on these shares moved up as auctions failed, they didn't jump
up as much as interest rates paid to holders of some other auction-rate debt.
Friday, Aberdeen Asset Management Inc. said it would redeem $30 million of
outstanding auction-rate preferred securities and replace them with loans,
and Eaton Vance said Monday that it would redeem the outstanding auction-rate
preferred shares of three of taxable closed-end equity funds, switching it
doing so, both companies have created an avenue for investors in the preferreds
to sell their shares.
also has been working with banking partners to develop a new form of preferred
stock that includes a put feature, a variable rate demand preferred, which
would be eligible for purchase by taxable and tax-exempt money-market funds.
firm believes that these preferreds would be the best solution for refinancing
the preferreds of its muni funds and is in discussions with market participants
that could provide put commitments for the new preferreds, Adams said. "We
believe that it's an idea that has significant merit as a potential solution,"
success will depend, in part, on the acceptance of these new preferreds by
money-market funds, Adams said. Until the firm completes a transaction, "We
really can't be certain whether that's going to be a viable alternative to
refinancing all the municipal auction-rate preferreds," he said.
that solution prove workable, Nuveen hopes to have an initial transaction
or set of transactions done in a couple of months, Adams said. It then would
move to refinance the rest of the funds, but he cautioned that "it may
take longer than for the taxable funds, just due to the sheer number of municipal
the money-market preferreds do not prove workable, other approaches could
work on a temporary basis for Nuveen's municipal funds, Adams said. Those
include the use of debt leverage. "That can work especially in an environment
where interest rates are lower or declining," though it's not the optimal
approach, he said.
also could consider the potential use of tender option bonds from certain
muni bond funds' portfolios, derivative securities created from fixed-rate
bonds through a trust arrangement that effectively creates financial leverage
within a bond portfolio. They have a put-like feature that makes them money-market
fund eligible. However, their creation would be limited by the availability
of eligible municipal bonds from which to create them among other factors,
firm's primary objective is to employ the variable rate demand preferreds,
which would "have applications for the taxable funds as well," Adams
timing of any funds' refinancing will depend on the nature of its portfolio,
its leverage structure, the cost of the financing arrangement, the ability
to obtain sufficient credit and put-provider capacity, among other factors,
Adams said on a conference call Nuveen held Wednesday.
if the refinancings will occur before income-tax deadlines loom, he said,
it would be "very challenging to guarantee that we would have any fund
that would have completed refinancing in that timeframe."
of the firm's efforts will be subject to market conditions, Adams said. He
emphasized that the credit quality of the funds' holdings is high and that
the preferreds are backed by significant asset coverage, but noted that in
the current financial environment, credit, even to strong creditors "is
went private in November after being acquired by a group of private investors
led by Madison Dearborn Capital Partners Inc.
from all this:
1. The issuers
are stepping up to the plate. But your letters and emails are still needed.
Keep sending them. Our pressure is working.
2. Our money
3. Getting it
back will take time. I'm guessing in some cases as long as a year.
we are receiving dividends. Some of us are getting tax-free monies. In most
cases, these dividends look better than what you can earn in the stockmarket
-- although I still love gold, silver, oil, commodiities, and Australian mining
stocks. I notice that gold just touched $1,000 an ounce. More about them tomorrow.
5. Only borrow
from your broker or bank IF the terms of your loan include the provision
that your loan repayment will happen as your ARPs are redeemed for cash.
6. As I've said
all along, it's too early for lawyers.
in California on "vacation."
I'm enjoying it more as I feel better about my ARPs.
words the ladies use. A Man's Guide to a New Language.
This is the word women use to end an argument when they are right and you need
to shut up.
2. Five Minutes:
If she is getting dressed, this means a half an hour. Five minutes is only five
minutes if you have just been given five more minutes to watch the game before
helping around the house.
This is the calm before the storm. This means something, and you should be on
your toes. Arguments that begin with nothing usually end in fine.
4. Go Ahead:
This is a dare, not permission. Don't Do It!
5. Loud Sigh:
This is actually a word, but is a non-verbal statement often misunderstood by
men. A loud sigh means she thinks you are an idiot and wonders why she is wasting
her time standing here and arguing with you about nothing. (Refer back to #3
for the meaning of nothing.)
6. That's Okay:
This is one of the most dangerous statements a woman can make to a man. That's
okay means she wants to think long and hard before deciding how and when you
will pay for your mistake.
A woman is thanking you, do not question, or faint. Just say you're welcome.
8 . Whatever:
A woman's way of saying Drop Dead, or stronger words.
9. Don't worry about it, I got it : Another dangerous statement, meaning
this is something that a woman has told a man to do several times, but is now
doing it herself. This will later result in a man asking "What's wrong?"
For the woman's response refer to #3.
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
is . You can't
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