More and more investment funds say they are stepping up plans to return cash to investors who have been stranded in the auction-rate preferred stock market - one of the recent casualties of the credit crisis. However, the process may be slower than some investors might like.
Nuveen Investments Inc., the largest U.S. manager of close-end funds, said it had lined up new debt and was working on refinancing $15.4 billion of auction-rate stock, issued by 100 of its closed-end mutual funds. The firm hopes to begin announcing plans for 13 of the funds, which own stock or invests in government or corporate bonds, to redeem their preferred shares by the end of the month. But Nuveen warns refinancing all 13 funds could take as long as six months, and that success would hinge on “market and economic conditions factors beyond our control.”
ING Clarion Real Estate Securities said two of its funds would partially redeem auction-rate stock. Their rescue plan would retire only a portion of the auction-rate shares of the two funds it was targeting -- 22% in the case of Clarion Global Real Estate Income and 33% for Clarion Real Estate Income.
Eaton Vance Corp. said that three of its funds would buy back auction-rate stock.
Morgan Stanley Investment Management and Van Kampen Funds Inc. plan to hold investor conference calls Friday to discuss the debt situations of their closed-end funds.
For years, auction-rate securities have been used to raise money for closed-end investment funds and municipalities. But as the credit crunch deteriorated this year, investors shied away from the auctions amid concerns over liquidity and bond insurers. As auctions failed, current owners of the securities have been told they were stuck with them - although they were continuing to earn interest. Currently, closed-end funds have more than $60 billion of auction-rate issues outstanding. Municipalities owe about $300 billion via the debt.
Some investors have called for brokerages to buy the securities to help their customers, but no major firm has been willing to provide relief. At best, investors have been told that if they need cash, they could borrow against the securities.
A longer wait may face investors in auction-rate securities of closed-end funds that own tax-free municipal bonds. The challenge for muni-bond funds is replacing current debt with borrowed money that won’t cost more than what the funds earn on their bonds.
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