Even though it’s been awhile the auction-rate securities market froze in 2008, credit-ratings firm Fitch Ratings’s new report says that US closed-end funds still hold $26.4 billion in auction-rate preferred shares (ARPS). Researchers say that even though this figure is a 57% drop from the $61.8 billion that was trapped in ARS in January 2008 they are still surprised by the current amount.
While ARPS holders have obtained liquidity through many redemptions, there is still a significant amount that is outstanding. Fitch says that 61% (250) of closed-end funds continue to be leveraged with auction-rate preferred shares. This is down from the 347 in January 2008. Fitch’s report is based on a review of 437 US closed-end funds’ publicly available financial statements.
Since the ARS market collapse in February 2008, closed-end funds have redeemed shares at par value via refinancing or by lowering the funds’ leverage. Still others have offered to purchase the shares at below par value. 22% of the funds that Fitch reviewed has fully redeemed about $22.9 billion in ARPS, while 50% undertook partial redemptions of shares totaling $12.7 billion.
Recently, some of the funds’ common shareholders have alleged that fund boards redeemed shares at par while favoring ARPS holders and as a result were in breach of fiduciary duty. Refinancing has slowed as a result of the charges but Fitch says that the redemptions should start up again soon.
The funds must maintain a 200% minimum asset coverage when it comes to senior securities and at least 300% in regards to debt securities. For every $1 of preferred stock issued, a fund must have a minimum of $2 in assets. Fitch reports that along with the recovery of asset values, refinancings started up again during the second half of last year and the first half of this year. Senior, short-term financing has served as the most common type of alternate leverage.
Funds Hold Billions in ‘Auction’ Paper, Wall Street Journal, September 1, 2010