Some help is finally arriving in the broken $330 billion auction-rate market that stuck investors with securities that no one wanted to buy since the beginning of this year.
Yesterday, the Financial Industry Regulatory Authority (FINRA) responded to investors’ frustration with their illiquid assets in the auction-rate securities market by releasing guidelines for investors to deal the problem. To meet cash-flow needs, the guidelines suggested investors could sell the investments to other parties in secondary markets or borrow against the value of their holdings from their brokerage firms. However, FINRA pointed out risks like tax consequences in taking out margin loans and warned that brokerage firms may sell an investor's auction-rate securities to meet a margin call without letting them know first.
Meanwhile, UBS AG announced last Friday it will mark down the values of auction-rate securities on investors’ brokerage statements, causing levels for the securities in one burgeoning trading platform for auction-rate securities to fall slightly yesterday.
Issuers of these securities are also scrambling to adjust. With the SEC’s blessing, some municipalities whose debt reset to high penalty rates after their auctions failed have refinanced or placed bids in their own auctions.
Closed-end funds also issued auction-rate securities to fund their investments with borrowed money. Since their borrowing rates have gone up, they are also looking to refinance. For example, ING Clarion Real Estate Securities plans to retire some auction-rate debt by purchasing some of its own adjustable-rate preferred securities starting today. Other fund providers like Eaton Vance and Nuveen Investments have also announced plans to refinance closed-end funds in the past few weeks.
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