Commentary

This month there has been significant turmoil in the so-called auction rate preferred market. What has occurred are called failed auctions, events in which not enough buyers bid on the amount of preferred shares that were up for auction. All five Calamos closed-end funds use auction rate preferred shares as a way to leverage our portfolios and potentially increase returns for investors. Calamos closed-end funds, along with the closed end funds of other firms, have been impacted by these events.

Many auctions are failing now because dealers, which previously had been willing to purchase the preferred shares that didn't receive bids in auctions, are no longer willing to do so given current stresses on their balance sheets. When an auction fails, the pre-auction preferred holders keep the securities and are paid a maximum dividend from a calculation based on other, more liquid short-term rates such as commercial paper or Libor. The terms are spelled out in the prospectuses of the closed-end funds. However, in many instances recently we have seen shares change hands on a pro-rata basis.

We would like to emphasize important points:

• We have seen most rates in our closed-end funds, even for auctions that succeeded, at or near the maximum levels.
• Common shareholders of the closed-end funds are not directly affected by the failed auctions. However, the net asset value (NAV) of the funds over time may be negatively affected because of higher preferred dividend rates.
• These failed auctions are considered a liquidity event since there are not enough bids in the auction to clear out all the sellers. The auction failures are because of the capital constraints of the lead brokers not because the preferred market is seeing higher credit risk, or risk that preferred dividends will not be paid.
• We do not know when this will end, but we are working with our banking partners to review all potential options in this space. In doing so, we are committed to acting in the best interests of our funds and their shareholders.

A Short Primer on Closed End Fund Leverage

Following a common stock offering, Calamos closed-end funds issue preferred shares as a way to leverage the fund. Typically a preferred offering will result in the fund raising approximately 50% of the recently completed common offering. When taken together the leverage rate will equal approximately 33% (preferred assets/total fund assets). The preferred shares typically receive a short-term rate of interest and are auctioned every 7 or 28 days. In a hypothetical example, if we were to raise $70 million from common shares in the initial offering for a closed-end fund, we could purchase $70 million in securities. However, we hypothetically could raise another $35 million by issuing preferred shares. That would create a total portfolio with $105 million in initial assets and leverage in the portfolio would be considered 33%.

If the new fund's $105 million portfolio returns 6% in a year, common shareholders may receive an even higher return. This is because they also benefit from returns on the assets purchased with the funds from preferred shares that exceed the short-term rate (assume 4%) owed to preferred shareholders. On the flip side, if the portfolio return is below 4%, common shareholders may gain less or have losses because the fund likely must cover the 4% distribution expense using common shareholder returns. Essentially, common shareholders in leveraged products have the potential for greater returns but take on more risk compared with a nonleveraged fund. Returns to common shareholders in closed- end funds ultimately depend on the changes in share price and regular common-stock distributions, which both often are linked to the performance of the underlying portfolio.

Preferred Share Auctions

Typically, a closed-end fund will issue Auction Rate Preferred (ARP) shares that are priced at $25,000 and are rated Aaa/AAA, the highest credit ratings by Moody's, Fitch and Standard & Poor's. The dividend rate on the preferred shares is reset through the auction process every 7 days or 28 days, depending on the terms of the securities. The auctions are Dutch style, a process in which investors, without knowing what others are bidding, offer to buy a maximum amount of preferred shares at the minimum dividend rate they are willing to accept. If there are enough bids to cover all the shares up for auction, the investors willing to accept the lowest rates buy shares. The new reset rate, which will be the same for all investors chosen in the auction to purchase shares, is the highest rate offered among the winning bidders.

A Word About Risk

Leverage creates risks which may adversely affect return, including the likelihood of greater volatility of net asset value and market price of common shares; and fluctuations in dividend rates on any preferred shares.

The Global Total Return and Global Dynamic Income Funds may invest up to 100% of their assets in foreign securities and may invest in an array of security types and market cap sizes, each of which has a unique risk profile. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities. These include fluctuations in currency exchange rates, increased price volatility, and difficulty obtaining information.

Investments by the funds in lower-rated securities involve substantial risk of loss and present greater risks than investments in higher-rated securities, including less liquidity and increased price sensitivity to changing interest rates and to a deteriorating economic environment.

There are certain risks associated with an investment in a convertible bond such as default risk—that the company issuing a convertible security may be unable to repay principal and interest—and interest rate risk—that the convertible may decrease in value if interest rates increase. Fixed-income securities are subject to interest rate risk; as interest rates go up, the value of the debt securities in the Fund's portfolio generally will decline.

Global Total Return and Global Dynamic Income Funds may invest in derivative securities. The use of derivatives presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. There is no assurance that any derivative strategy used by the Funds will succeed. One of the risks associated with purchasing an option is that the Funds pay a premium whether or not an option is exercised. Shares of closed-end funds frequently trade at a market price that is below their net asset value.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein should not be considered investment advice.