US Closed-End Funds Continue to Hold $26.4 Billion in Auction-Rate Preferred Shares, Says Fitch Ratings

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.

If you are an institutional investor that was the victim of securities fraud, please contact our stockbroker fraud law firm immediately to request your free case evaluation.

Funds Hold Billions in ‘Auction’ Paper, Wall Street Journal, September 1, 2010

Fitch Ratings