Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Tuesday, March 11, 2008: Yesterday's
super-important press release:
Announces New Financing Arrangement for Three Closed-End Funds
to be Used for a Complete Redemption of the Funds' Auction Preferred Shares
BOSTON, MA -
Eaton Vance Corp. (NYSE: EV) announced today that three closed-end equity
funds managed by its affiliate Eaton Vance Management have secured committed
financing totaling approximately $1.6 billion that the funds intend to use
to redeem all of their outstanding auction preferred shares ("APS").
The three closed-end funds are: Eaton Vance Tax-Advantaged Dividend Income
Fund (NYSE: EVT); Eaton Vance Tax-Advantaged Global Dividend Income Fund (NYSE:
ETG); and Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (NYSE:
ETO) (collectively, the "Funds"). With the new financing, the Funds
intend to change their method of leverage from APS to debt. The Funds expect
to redeem in full their outstanding APS, subject to completion of their new
financing arrangements and satisfying the notice and other requirements that
apply to APS redemptions. It is expected that each series of the Funds' APS
will be redeemed at the next dividend date after March 28, 2008. See www.eatonvance.com
under closed-end fund press releases to view the Funds' announcement. To receive
a hard copy of this information call (800) 225-6265.
manages 29 leveraged closed-end funds with approximately $5 billion of APS
outstanding collectively. Completion of the intended APS redemptions being
announced today will reduce the amount of outstanding APS for Eaton Vance
sponsored closed-end funds by approximately 32%. Eaton Vance understands that
the current disruption in the auction rate securities market imposes significant
hardship on APS holders who need access to liquidity. Eaton Vance is working
diligently to provide liquidity solutions for its funds' remaining APS holders,
and is hopeful that it will be able to do so. Different solutions may be most
workable for different types of funds (equity, taxable income and municipal
income). The financing arrangement being announced today is only applicable
to the three equity funds; other alternatives are being pursued for other
types of funds and it is not certain when, or if, solutions will be available
to these funds.
Corp., a Boston based investment management firm, is listed on the New York
Stock Exchange under the symbol EV. Through its subsidiaries, Eaton Vance
Corp. manages funds and separate accounts for individuals and institutional
The company also
issued three releases on its web site. The first reads:
The second reads:
the normal functioning of the auction market for certain types of "auction
rate securities" in the U.S. has been disrupted by an imbalance between
buy and sell orders. Issuers of auction rate securities include student loan
programs, municipalities and closed-end funds. A number of Eaton Vance closed-end
funds (the "Funds") have outstanding series of Auction Preferred
Shares ("APS"). The APS issued by the Funds are senior equity securities
that are entitled to receive a stated liquidation preference amount in any
liquidation, dissolution or winding up of the Fund before any distribution
or payment to holders of the Fund's common shares. Dividends declared and
payable on the APS have a similar priority over dividends on a Fund's common
shares. The APS are perpetual securities and are not subject to mandatory
redemption so long as the Fund meets certain specified asset coverage tests,
which include a requirement set forth under the Investment Company Act of
1940 that each Fund maintain, as of the last business day of each month, asset
coverage of at least 200% with respect to the APS and any other outstanding
senior securities. Each of the Funds remains in compliance with all APS asset
coverage tests and the APS continue to be highly rated (AAA/Aaa or AA/Aa).
market conditions, dividend rates on the APS for each dividend period (typically
weekly, but longer in certain cases) are set at the market clearing rate determined
through an auction process that brings together bidders who seek to buy APS
and holders of APS who seek to sell. In the event of an imbalance of sell
orders over bids, the auction does not clear, and the dividend payment rate
over the next period for APS holders is set at a specified maximum applicable
rate, equal to a stated spread over a reference market benchmark rate. An
unsuccessful auction is not a default; the Fund continues to pay dividends
to all APS holders, but at the specified maximum rate rather than a marketclearing
patterns in the broader market for auction rate securities, in recent weeks,
a number of Funds have experienced unsuccessful APS auctions. As described
above, in the event of an unsuccessful APS auction, the affected APS shares
remain outstanding, and the dividend rate reverts to the specified maximum
payable rate. We believe that the earnings rate on the Funds' assets continues
to exceed the cost of the APS, based on the current maximum applicable rates,
and that leveraging the Funds remains appropriate. So long as the earnings
rate on a Fund's assets exceeds the cost of leverage, reducing or eliminating
leverage is generally not in the best interests of the Fund's common shareholders.
dividend rate and other information for each series of the Funds' APS are
posted to the Eaton Vance Closed-End Fund website and will be updated regularly.
continues to monitor closely developments in the APS market during this period
of disruption and is engaged in discussions with other market participants
to develop solutions to restore liquidity to holders of APS.
On March 10,
2008, three Funds announced that they had secured committed financing that
the Funds intend to use to redeem all of their outstanding APS. Eaton Vance
is hopeful that liquidity solutions can be implemented for its other Funds'
APS holders. Different solutions may be most workable for different types
of Funds (equity, taxable income and municipal income). It is not clear at
this time when a solution may be identified and implemented for other Funds.
Eaton Vance understands that the current disruption in the auction rate securities
market imposes significant hardship on APS holders who need access to liquidity
and is working hard to implement solutions as soon as possible.
and Answers Concerning Auction Preferred Shares Issued by Eaton Vance Closed-End
Answers Concerning Auction Preferred Shares
mid-February and consistent with patterns in the broader market for auction
rate securities, a number of Eaton Vance closed-end funds (the "Funds")
have experienced unsuccessful auctions of their auction preferred shares ("APS").
Set forth below are questions and answers about APS and the current situation
in the auction rate securities market.
1. What are
auction rate securities?
securities are variable rate debt or preferred equity instruments whose coupon
or dividend rate is reset at regular intervals (most commonly every seven
days), normally based on an auction process conducted by an independent auction
agent. Issuers of auction rate securities include student loan programs, municipalities
and certain closed-end funds.
2. Why do
closed-end funds issue auction rate securities?
securities are issued by closed-end funds to provide capital for investment
in accordance with the funds' objective and policies, in addition to the funds'
common equity. Use of debt or preferred equity by a fund to acquire additional
investments is referred to as "leverage." While leverage involves
additional risks to a fund's common shareholders, it can enhance the fund's
returns to the extent that the return on investments acquired through leverage
exceeds the cost associated with the leverage. The auction rate securities
issued by closed-end funds are preferred equity instruments rather than debt.
Auction preferred securities have historically provided closed-end funds with
financial leverage at a cost that compares favorably to other alternatives.
3. How many
closed-end funds have issued preferred securities?
the Investment Company Institute, 347 closed-end funds (of 668 total closed-end
funds) have preferred securities outstanding.
4. How many
Eaton Vance Funds have APS outstanding?
(29) Funds currently have outstanding APS. A listing of the Funds with outstanding
APS is shown on the closed-end funds section of the Eaton Vance website at
The total liquidation
preference value of the APS is approximately $5 billion. Three of the Funds,
with outstanding APS of approximately $1.6 billion, announced on March 10,
2008, a plan to redeem all their outstanding APS and replace the Funds' APS
leverage with borrowings. See Question 18 below.
5. What are
the principal terms of the APS?
APS are senior
equity securities that have a liquidation preference of $25,000 per share
plus the amount of any accumulated but unpaid dividends. Upon the liquidation,
dissolution or winding up of a Fund, APS holders are entitled to receive their
liquidation preference before any distribution or payment is made to holders
of the Fund's common shares. Dividends declared and payable on the APS have
a priority over dividends on a Fund's common shares. The APS are perpetual
securities and are not subject to mandatory redemption so long as the Fund
meets certain specified asset coverage tests, which include a requirement
set forth under the Investment Company Act of 1940 that each Fund Not maintain,
as of the last business day of each month, asset coverage of at least 200%
with respect to the APS and any other outstanding senior securities. APS may
be redeemed at the option of a Fund upon giving notice to APS holders. As
described in Question 18 below, three of the Funds announced on March 10,
2008, a plan to redeem all their outstanding APS and replace the Funds' APS
leverage with borrowings.
6. Have the
Funds' APS been rated by credit rating agencies?
Yes. The APS
issued by Eaton Vance Credit Opportunities Fund (EOE) is rated Aa1 by Moody's
and AA by Fitch. All APS issued by other Funds are rated AAA/Aaa by one or
more of Standard & Poor's, Moody's and Fitch. Information regarding the
ratings and senior securities coverage ratios of each Fund's APS is set forth
on the closed-end funds section of the Eaton Vance website at www.eatonvance.com.
7. Are recent
unsuccessful APS auctions likely to cause the rating agencies to downgrade
The status of
a Fund's APS auctions should not affect its credit rating. The Funds currently
are meeting the asset coverage requirements necessary to maintain current
ratings, and Eaton Vance expects them to continue to do so. As such, we do
not expect the APS to be downgraded. The current disruption in the APS market
is a liquidity issue, not a credit issue.
8. How does
the APS auction process normally function?
are typically conducted every seven days, 28 days or at other intervals determined
under procedures set forth in Fund by-laws. In an auction, holders of APS
may either offer shares for sale, hold their shares (and accept whatever dividend
rate results from the auction) or hold at a stated rate, meaning that they
will hold shares only if the clearing auction rate is at least equal to the
specified rate. Potential buyers must specify a minimum rate at which they
would buy shares. Orders are submitted to one or more broker-dealers that
have entered into an agreement with the APS auction agent. Brokerdealers then
submit customer orders, along with any orders for their own accounts, to the
auction agent. The auction agent fills bids to buy a Fund's APS to the extent
there are sufficient offers to sell, and fills sell orders to the extent there
are sufficient bids to buy the APS. The APS dividend rate for the next dividend
period is set at the lowest rate that will result in all outstanding shares
continuing to be held.
9. Are APS
holders always able to sell shares through the auction process?
If there are insufficient bids to buy the APS shares that are offered for
sale in a particular auction, the auction does not clear. If there are some
bids to buy APS through the auction but not enough bids to clear all of the
APS offered for sale, then the sell orders are filled pro rata to the amount
of the bids. If there are no bids to buy the APS offered for sale through
an auction, then no APS are transferred as a result of that auction.
an unsuccessful auction constitute a default or trigger redemption rights?
auction is not a default, nor does it trigger liquidation or `put' rights
for APS holders that require a Fund to redeem APS. Following an unsuccessful
auction, APS holders continue to receive dividends, although at a prescribed
maximum applicable rate rather than an auction-determined rate. All series
of the Funds' APS remain current in their dividend payments to shareholders.
an auction does not clear, how is the dividend rate set for the next dividend
When an auction
does not clear, the dividend rate for the next dividend period is set at the
maximum applicable rate established pursuant to the Fund's by-laws. The maximum
applicable rate is determined by reference to a market rate (such as LIBOR
or a commercial paper rate). The method for determining the maximum applicable
rate for each Fund's APS and the current dividend rate for each series of
APS are set forth on the closed-end fund section of the Eaton Vance website
is the effect of unsuccessful auctions on APS holders?
continue to receive dividends, though based on the prescribed maximum applicable
rate for the APS rather than an auction-determined rate. APS holders' ability
to sell shares through the auction process is limited to the number of bids
received, which may be zero. APS shares that cannot be sold in an auction
may be offered for sale at the next scheduled auction, which may also be unsuccessful.
is the ability of APS holders to obtain liquidity outside the auction process?
There is currently
no established mechanism for APS holders to obtain liquidity other than through
the auction process or redemptions of the APS by the issuing Fund. As described
in Question 18 below, three of the Funds announced on March 10, 2008, a plan
to redeem all their outstanding APS and replace the Funds' APS leverage with
borrowings. Eaton Vance is working diligently to provide liquidity solutions
for its other Funds' APS holders and is hopeful that it will be able to do
so. Different solutions may be most workable for different types of funds
(equity, taxable income and municipal income). It is not clear at this time
when, or if, a solution may be identified and implemented for the APS holders
of other Funds.
reports have described initiatives to develop a secondary market for closed-end
fund auction preferred securities, Eaton Vance does not believe an active
secondary market for APS exists today. If an active secondary market does
develop, APS may trade at less than their liquidation preference amount.
understands that a number of broker-dealers have initiated lending programs
with favorable terms for customers holding auction preferred securities. APS
holders should contact their financial advisor for details.
is the effect of unsuccessful APS auctions on a Fund's common shareholders?
As noted above,
unsuccessful auctions cause the dividend rate on the APS to increase to the
maximum applicable rate. This raises the Fund's cost of leverage and reduces
the net return earned on the Fund's leveraged assets. Eaton Vance believes
that the earnings rate of the Funds' assets continues to exceed the cost of
the APS based on current maximum applicable rates and that leveraging the
Funds remains appropriate. So long as the earnings rate on a Fund's assets
exceeds the cost of leverage, reducing or eliminating leverage is generally
not in the best interest of the Fund's common shareholders. Disruption in
the APS market does not affect the Funds' net asset values or the ability
of common shareholders to sell their stock, but may affect the volatility
and/or widen the market discounts that apply to secondary market trading of
the Funds' common shares.
15. If the
cost of the leverage becomes too expensive, will the Funds be forced to cut
their dividends on common shares?
have a direct impact on a Fund's ability to sustain dividends on common shares.
However, under the current circumstances and with APS rates as they are, the
use of leverage remains beneficial and has not resulted in a reduction in
the dividends to common shareholders.
unsuccessful auctions of the Fund's APS occurred in the past?
No. Until the
middle of February, none of the Funds had ever experienced an unsuccessful
APS auction. Among closed-end funds generally, unsuccessful auctions of auction
preferred securities have been extremely rare, and never occurred on a systematic
basis until February 2008. Since mid-February, all or nearly all auctions
of closed-end fund auction preferred securities have been unsuccessful.
happened to cause APS auctions to stop clearing in February?
believes that the seizing up of APS auctions in February occurred as a result
of broader dislocation in the financial markets, which first affected student
loan and municipal issuers of auction rate securities before spilling into
the closed-end fund auction preferred market. We do not believe that the unsuccessful
auctions are due to credit concerns relating to closed-end funds, which are
subject to asset coverage requirements that do not apply to other types of
auction rate securities. Specifically, closed-end funds are required by the
Investment Company Act of 1940 to maintain asset coverage of at least 200%
with respect to their preferred stock and other senior securities outstanding,
meaning that the funds must maintain at least $2 of assets for each $1 of
senior securities. In addition, closed-end funds offer investors considerable
transparency, providing daily net asset values and periodic reporting of fund
holdings and other financial data.
actions is Eaton Vance taking to address the current situation?
is working diligently with other market participants to develop solutions
for restoring liquidity to APS holders as quickly as possible. On March 10,
2008, three Funds with outstanding APS of approximately $1.6 billion announced
that they had secured committed financing that the Funds intend to use to
redeem all of their outstanding APS.
The three Funds
are: Eaton Vance Tax-Advantaged Dividend Income Fund (NYSE: EVT), Eaton Vance
Tax-Advantaged Global Dividend Income Fund (NYSE: ETG) and Eaton Vance Tax-Advantaged
Global Dividend Opportunities Fund (NYSE: ETO). With the new financing, the
Funds intend to change their method of leverage from APS to debt. The Funds
announced that they expect to redeem in full their outstanding APS subject
to completion of the new financing arrangements and satisfying the notice
and other requirements that apply to APS redemptions. It is expected that
each series of the Funds' APS will be redeemed at the next dividend payment
date after March 28th. The cost to the Funds of the new debt leverage is expected
to be lower than the maximum applicable dividend rates on the APS that now
apply. The Funds will not be required to sell portfolio holdings to participate
in the financing arrangement.
the intended APS redemptions described above will reduce the amount of the
Funds' outstanding APS by approximately 32%. Eaton Vance is hopeful that liquidity
solutions can be implemented for its Funds' remaining APS holders. Different
solutions may be most workable for different types of Funds (equity, taxable
income and municipal income). The financing arrangement for the three Funds
described above is only applicable to equity funds; other alternatives are
being pursued for other types of funds. It is not clear at this time when,
or if, a solution may be identified and implemented for other Funds' APS holders.
While we seek to restore liquidity to APS holders, we are providing them with
current information about auction results and dividend rates (see the closed-end
funds section of our website at www.eatonvance.com)
as well as regular updates on market conditions and other information relevant
to Fund shareholders. Eaton Vance understands that the current disruption
in the auction rate securities market imposes significant hardship on APS
holders who need access to liquidity and is working hard to implement solutions
as soon as possible.
is provided solely for informational purposes and is not to be considered
tax, legal or investment advice. This document is not intended as a solicitation
or an offer to buy or sell any security or other instrument. The foregoing
information is based on market conditions as of the date hereof; different
conditions and assumptions may have materially different results.
The third release
is a table showing all the auction preferred shares issued by Eaton Vance, their
cusip numbers, their current dividend, their next reset, etc. For the table,
My comments: This
Eaton Vance redemption is critically important. Friday's redemption by Aberdeen
involved only $30 million. This one by Eaton Vance involves $1.6 billion.
That's a major difference and gives me serious hope that companies like Nuveen
(the biggest issuer of auction rate preferreds) won't be far behind.
The sad part of
all this is that the funds have been so reluctant to give their auction rate
preferreds holders any emotional solace. And many have been suffering, fearful
that their life savings are lost.
I cannot personally
guarantee that other firms will follow Eaton Vance's lead. I do believe:
1. It is still
too early for lawyers. I hear that some panicking ARPs shareholders are
already signing high contingency fees -- some as high as 40%. In other words,
if your fund does do an Eaton Vance and redeem without the necessity for legal
action, you may still owe your lawyers 40% of what you get back.
2. I believe
other ARPs issuing firms will follow the leads of Eaton Vance and Aberdeen.
I worry that with the accelerating mess in financial markets, some issuers may
find securing loans difficult. There may simply be not enough money around.
Or lenders may feel reluctant to tie their monies up. In short, I'm optimistic,
but recognize it could take many many months for all of us to be pulled out
of our auction rate preferreds.
3. You can
borrow against your auction rate preferreds. But you must be very careful
of the terms of the loan. The ideal terms would include a provision that your
loan was due the day you received your cash redemption from the issuer (e.g.
Eaton Vance, Nuveen , BlackRock, etc.) If you agree to a finite time -- the
most common provision of any loan -- you may be caught in the trickbag of owing
your bank or broker money before your ARPs mature. If you don't have
the cash at that time, you could lose your ARPs to the bank or broker (called
foreclosure in the housing business), who may sell it at a substantial discount
-- say 30%. Losing 30% on a "cash equivalent" is not healthy.
4. You need
to send the Eaton Vance news to your broker and your ARPs issuer. You can
email. But I'd prefer you write letters. Explain your financial plight -- you
need to pay taxes on April 15, you need to close on a house, you need to pay
college bills, etc. While every ARPs issuer in the world by now knows about
the Eaton Vance and Aberdeen moves, it does not hurt for your letters to roll
in explaining your personal plight. Believe it or not, people who run these
funds have families. Some have emotions. And some might actually be sympathetic.
5. Don't forget
your dividends. While this plays out, we are still getting our dividends.
I'm receiving the equivalent of 7% pre-tax on my Nuveen tax-free preferreds.
I'd be happy to sit though the present stockmarket meltdown with this payout
from Nuveen, if I felt comfortable that one day soon I could get access to my
cash currently locked in Nuveen ARPs.
stockmarket is in major meltdown: I'm glad
I told everyone to get out in mid-November. Most economic indicators are going
(or have already gone) negative on us -- employment, inflation, dollar, housing,
energy, credit crunch, etc. I don't like writing "gloom and doom,"
but much of it is spreading. For example, a website called Angelqueen.org
publication normally avoids matters not immediately related to Catholicism,
particularly traditional Catholicism, there are, at times, exceptions to every
rule. This is one of those times.
economy, there are troubling storm clouds gathering. Records being broken
and precedents being set, that when pondered after totaling the sum of their
parts, indicate clearly, as the title of this article suggests, that economic
chastisement will be a part of all of our lives in the near future. It seems
no longer a question of whether or not such chastisement will occur; only
how severe it will have been when all is said and done.
BIG lesson for today's stockmarkets: Do not
try and catch a falling knife. This is an old Wall Street expression that means
don't try and time the bottom. Don't buy, thinking the stock has hit bottom
and has become a "bargain." For evidence, check out all the "super-smart"
investors who dumped huge monies into many banks etc. to shore them up in recent
months. Virtually all (maybe all) have lost money. Look at Citigroup, for example.
Back in November, it received $7.5 billion from the investment arm of the government
of Abu Dhabi. At that time, Citigroup's shares were around $30. They're
now 33% lower. Abu Dhabi has lost $2.5 billion, so far. (In contrast,
I'm short Citigroup.)
on Auction Rate securities in yesterday's column: It contained a
list of readings, people to contact and other useful information.
Jawbone BlueTooth headset is superb: I had
to return one because it broke. And I had to figure how to get it on and off
my ear quickly and comfortably. Now I'm set. I love it. This is the ONLY way
to use a cellphone, especially a BlackBerry. With this thing, I can talk in
the car and still drive. I can talk on my cellphone and take notes with two
hands on my computer. I can walk along the street and actually speak. The thing
filters out much outside noise. The thing has saved my weary shoulders. You
can buy Jawbone for under $80 from everyone and their uncle, including Amazon.
A company called eCost.com has it for $74. Click
here. Make sure you plug the charger in the right way. It says "top."
best friend. A dog is truly a man's best friend.
If you don't believe
it, try this experiment:
Put your dog and
your wife in the trunk of your car for an hour.
When you open
the trunk, ask yourself, "Who is really happy to see you?"
old guys. Three
old guys talking:
the worst age to be," said the 60-year-old man. "You always feel like
you have to pee and most of the time you stand there and nothing comes out."
nothin," said the 70-year-old. "When you're seventy, you don't have
a bowel movement any more. You take laxatives, eat bran, sit on the toilet all
day and nothin' comes out!"
said the 80-year -old, "Eighty is the worst age of all."
"Do you have
trouble peeing, too?" asked the 60-year old.
"No, I pee
every morning at 6:00. I pee like a racehorse on a flatrock; no problem at all."
a problem with your bowel movement?" ....
"No, I have
one every morning at 6:30."
the 60-year-old said, "You pee every morning at 6:00 and crap every morning
at 6:30. So what's so bad about being 80?"
wake up until 7:00."
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
click on my email address. You have to re-type it . This protects me from software
scanning the Internet for email addresses to spam. I have no role in choosing
the Google ads on this site. Thus I cannot endorse, though some look interesting.
If you click on a link, Google may send me money. Please note I'm not suggesting
you do. That money, if there is any, may help pay Michael's business school
tuition. Read more about Google AdSense, click
here and here.