Aberdeen Global Income Fund Inc. plans to buy back all its auction-rate debt by redeeming $30 million of auction-rate securities known as preferred shares and replacing them with loans from a major financial institution. Aberdeen Global is the first closed-end fund to take the step since the auction-rate market seized up in mid-January.
About half of all closed-end funds used the auction-rate market to finance additional investments in government and corporate bonds. Many brokers marketed the securities as a short-term investment similar to a money-market fund. Auctions began failing earlier this year and preferred shareholders got stuck with about $60 billion in securities as investors fled all but the safest government debt. This news may put pressure on other fund managers to buy back auction-rate debt.
Managers including Chicago-based Nuveen Investments Inc. and Boston-based Eaton Vance Corp., have resisted buying back their preferred shares, explaining that it would hurt their common shareholders. Nuveen and Eaton, the largest closed-end fund managers, have said they are in talks with major banks aimed at bringing new liquidity to the market. Eaton Vance has indicated that it would like to replace its preferred shares with a new form of debt that money-market funds could buy. But that is not an easy thing to do. Money funds are barred from buying securities with maturities longer than 13 months, unless they hold the right to sell back to the issuer at any time.
Cecilia Gondor of Thomas J. Herzfeld Advisors Inc., which specializes in close-end fund research, predicts that not many would follow Aberdeen Global’s example. In addition to being a small fund, Gondor said Aberdeen had a maximum interest rate, which takes effect when an auction fails, considerably higher than most closed-end funds, giving Aberdeen more incentive to refinance. Other fund managers have said their funds have a higher return from their investments than they pay in interest to preferred shareholders.
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