Friday, March 28, 2008

More Auction Rate News

The auction rate security market is still not working and as I noted here before, the issuers are trying to find ways to provide some liquidity to the now long term owners of these securities. Legg Mason is apparently trying to work this out for the preferred stock investors in their closed end funds:

NEW YORK (MarketWatch) -- Asset manager Legg Mason said Friday it is urgently trying to generate liquidity for shareholders of seven closed-end funds it manages that collectively own more than half a billion dollars of unsellable auction-rate preferred securities
"Legg Mason is fully aware of the urgency to resolve this situation, and of the uncertainty, frustration and difficulties these failed auctions have caused for shareholders of these securities, and is committed to explore any and all possible solutions that are equitable to both the preferred and common shareholders of these funds," the company said in a press release.

The problem for the funds is that alternate funding sources are scarce right now. The funds do not want to just redeem the preferreds because that would mean selling bonds in their portfolio to fund the redemptions. With a steep yield curve there is still an advantage to adding leverage to a muni bond portfolio so they don't want to do that unless they absolutely have to. Some other fund families have found bank financing to replace the auction rate funding but I suspect the rates are not as good as what they got from the auction rate market. That will likely mean dividend cuts for some of these funds.

The municipalities have had an easier time redeeming their auction rate securities. There are always buyers for long term municipal bonds. The funds will take longer as the funds will need to line up alternate financing to continue their leveraged portfolios. There is not a lot of appetite for funding leveraged investment vehicles at the moment. Ultimately, I expect all of the securities from the major participants in the auction rate market to be redeemed. That may not be true of some of the smaller players; if you own an auction rate from an issuer you've never heard of, you might have a problem. I have been contacting some fund companies about their plans so if you have auction rates that you are not sure about, send me an email ( and I'll try to get some information for you.

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