ICI Asks SEC to Provide Relief for Closed-End Funds' Auction Market Preferred Stock Washington, DC, April 28, 2008 - The Institute recently made a request for temporary exemptive relief that, if granted, would enable many closed-end funds to restore liquidity in the market for auction market preferred stock (AMPS). Background
For the last two months, the liquidity crisis that has affected the global markets generally has spilled over to the market for auction rate securities of all types, including those issued by closed-end funds. More than half of the 668 closed-end funds have AMPS outstanding as of the end of the first quarter of 2008. Closed-end funds typically issue AMPS that pay dividends at rates set through auctions held every seven or 28 days. Bids are filled to the extent shares are available, and sell orders are filled to the extent there are bids. These auctions have operated successfully for the last twenty years. Since mid-February auctions for AMPS issued by closed-end funds have failed because there were more shares offered for sale than there were bids. The failed auctions were not caused by defaults under the terms of the AMPS or credit quality concerns with closed-end funds. Because auctions are not providing liquidity and there is no established secondary market, AMPS holders wanting to sell their shares are unable to do so. A few fund firms have announced that they have refinanced, or soon will be refinancing, some or all of the AMPS issued by some of their funds with debt in the near future. Doing so will provide their AMPS holders with liquidity, but replacing all of their outstanding AMPS with debt is not an attractive option for most closed-end funds unless the Commission relaxes the asset coverage requirements for debt to 200 percent. Of the 358 funds with AMPS outstanding, eighty-two percent have asset coverage of at least 200 percent but lower than 300 percent. Only 18 percent of funds with AMPS outstanding have asset coverage of 300 percent or greater. ICI Position
ICI's request would conditionally permit closed-end funds with AMPS outstanding to issue debt to replace their AMPS subject to a lower asset coverage requirement than is currently permitted by the Investment Company Act. Swift and creative action is required to address the liquidity crisis currently faced in the U.S. and other markets. ICI believes that its request will help enable closed-end funds to obtain financing to provide much needed liquidity to closed-end fund preferred shareholders while maintaining the benefits of leverage for common shareholders. The Institute has worked extensively with its members to develop this proposal and requests that the Commission make such relief immediately effective upon issuance. Specifically, ICI has asked the SEC to permit closed-end funds with AMPS outstanding to have 200 percent, rather than 300 percent, asset coverage subject to certain conditions, including: - the closed-end fund only will apply a 200 percent asset coverage requirement to debt issued to redeem any or all of its AMPS that were outstanding on February 12, 2008 (the first date on which auctions for most closed-end fund AMPS failed);
- such debt will be issued only to sophisticated institutional investors, such as banks and insurance companies;
- the closed-end fund's board of directors will find that the proposed transaction is in the best interests of the fund's shareholders, taking into account the interests of the common and preferred shareholders; and
- the order will expire three years from its date of issuance.
ICI provides background material on closed-end funds which discusses the auction rate preferred securities issued by closed-end funds, the causes and implications of a failed auction, and the responsibilities of a closed-end fund in the event of a failed auction.
|
