Blackrock, Nuveen & Eaton Vance to Sell New Preferred Security to Buy-Back ARPS

Blackrock, Nuveen and Eaton Vance, the three biggest U.S. closed-end fund companies, have cleared regulatory obstacles to begin selling a new type of preferred security that can be bought by money-market funds.  The companies intend to use the proceeds from these sales to redeem ARPS that their investors have not been able to sell since the auction rate securities market collapsed in February.  However, financial experts have already expressed skepticism as to whether this strategy will work because money-market buyers’ propensity to incur risk has been quelled since the ARS market collapse.

Prior to the February ARS-market collapse, closed-end funds such as Blackrock, Nuveen and Eaton Vance, used preferred shares issued on the auction market to raise long-term debt, while paying interest at short-term rates that reset through the auction process.  Money raised was used to increase investments by as much as 50 percent to boost returns for common shareholders of the funds.

While these closed-end fund companies have no legal obligation to redeem the shares, the companies have come under pressure from their investors, regulators and politicians to find ways to finance their repurchase.  Generally, the closed-end funds have used bank loans, commercial-paper conduits and tender option bonds to finance the redemptions.  To date, funds have redeemed or scheduled redemptions for only approximately 25 percent of the $64.3 billion in ARPS that were outstanding in February.