March 11, 2008
Some more news of a positive nature when it comes to CEFs and their ability to find new sources of money.
Eaton Redeems Auction-Rate Shares
By SHEFALI ANAND and DAISY MAXEY
March 11, 2008; Page C2
Some investors stuck in auction-rate preferred securities soon will get their money back.
Closed-end-fund manager Eaton Vance Corp. said yesterday that it would redeem $1.6 billion worth of preferred securities issued by three of its stock funds.
The move follows an announcement by Aberdeen Global Income Fund, which said Friday that it would redeem $30 million of such securities, giving hope that more such redemptions will be under way in the next few weeks for some funds. Both Eaton Vance and Aberdeen plan to replace these with debt from one or more financial institutions.
The three funds from Eaton Vance that will redeem preferred shares are Tax-Advantaged Dividend Income Fund, Eaton Vance Tax-Advantaged Global Dividend Income Fund and Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund. The redemptions are expected to be done by the next dividend date after March 28, the company said in a release Monday.
Auction-rate securities were bought by investors as liquid investments. The rates on them normally reset in auctions every seven to 90 days. Amid the credit crunch, buyers suddenly backed away from these securities in February, leaving investors stuck.
After the auctions failed, the securities automatically reset to higher interest rates to reflect a penalty. However, in the case of preferred securities issued by closed-end funds, the maximum rates have been low, sometimes 0.20 to 0.30 percentage point higher interest than normal.
Still, it is increasingly becoming uneconomical for funds to keep paying these rates, pushing them to resolve the situation quickly. The Aberdeen fund, for instance, was paying 6% last week, one of the higher maximum rates among closed-end funds.
The three Eaton Vance funds were paying maximum rates of about 4.38%, which is "on the higher end" compared with other Eaton Vance closed-end funds, said Jonathan Isaac, director of product management at Eaton Vance. The $1.6 billion redemption will represent nearly a third of all auction-rate preferred shares issued by the fund company.
In all, closed-end funds have about $60 billion worth of preferred securities outstanding.
The redemption of preferred shares in stock funds is a first step, and companies are looking at other options for other asset classes, such as municipal-bond funds.
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