Ten Morgan Stanley closed-end municipal-bond funds have approved using alternate sources of leverage that would allow the funds to redeem some of their auction-rate preferred shares so some investors can get their frozen assets back. A timetable has not been set for the redemptions.
Tender Option Bonds will refinance up to 30% of each fund’s ARPS leverage. The bonds are derivatives created by placing high quality municipal bonds into a trust arrangement and each fund receives cash and a residual interest security. Then the trust issues securities which are purchased by third parties and pay interest rates that usually reset every week based on a short-term index rate.
However, bond usage depends on the availability of high-quality municipal bonds at certain yield levels to be transferred to the trust structure and demand for the securities issued by the trust. Higher short-term interest rates would increase payable interest on the trust securities but the generated income would be lower meaning a reduced income for shareholders and a possible decline in the overall yield and market value of each fund’s common shares.
The 10 funds approving the alternative leverage are Morgan Stanley Insured Municipal Trust, Insured Municipal Bond Trust, Insured Municipal Income Trust, California Insured Municipal Income Trust, Quality Municipal Income Trust, Quality Municipal Investment Trust, Morgan Stanley Quality Municipal Securities, California Quality Municipal Securities, New York Quality Municipal Securities and Municipal Premium Income Trust.
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