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Media Advisory: The Impact of Credit Market Disruptions on Closed-End Funds
Recent disruptions in the market for auction rate securities have led to questions about the impact on closed-end funds. Auction market preferred securities are one source of borrowing that closed-end funds typically use to employ leverage in their portfolios. Following are some key points to reflect in coverage of this important topic.
- This is an issue of liquidity, not credit quality. The fundamental credit underlying auction market preferred securities issued by closed-end funds is sound.
- The assets of closed-end funds, which are valued on a daily basis, serve as the collateral for issuance of auction market preferred securities.
- By law, closed-end funds must have at least $2 of collateral for every $1 of auction market preferred securities issued.
- Closed-end fund issuers are continuing to pay interest on these securities.
- A failed auction is not a default.
- Closed-end funds have financing options aside from the auction market for maintaining leverage, including bank loans, repurchase agreements and credit lines.