Given the events of recent weeks, many closed-end fund sponsors have proactively reacted to the failure of their auction rate preferred securities by posting commentaries or hosting calls regarding the impact of this event on their closed-end funds and on the closed-end fund industry generally.
However, fewer sponsors have addressed the impact on the actual preferred securityholder. In the weeks and months to come, we expect two opposing forces—both claiming to offer resolutions—to enter the arena and battle for attention:
- The Contenders are the sound alternatives that sponsors will employ to alleviate this liquidity event in the best interest of shareholders.
- The Pretenders are those ideas that intend to take advantage of investors' desire to get liquidity through whatever means possible.
We believe that it is vitally important for advisors and investors in auction rate securities to carefully weigh those offers made from outside the closed-end fund sponsor community. To help, we offer the following summary.
The Contenders
It is important to understand that every closed-end fund sponsor that has exposure to the auction rate securities market is working around the clock to identify potential solutions. To put the task at hand in perspective, there are two main goals that we at Calamos are working toward:
- Provide liquidity to shareholders of the auction rate securities.
- Reduce our reliance on the major money center banks for liquidity.
These solutions must address the interests of the preferred shareholders as well as those of the common shareholders of our funds. At this time, there are multiple solutions that are being evaluated, all of which will generally require thoughtful consideration and analysis in addition to approval by the funds' senior management and Board of Trustees.
In the end, the solution we settle upon as a sponsor must address our intent to return dollar for dollar the investment that the preferred securityholders entrusted to the funds while maintaining the interest of the common shareholders who account for a majority of fund assets.
The Pretenders
In any market, whether it be financial or other, "necessity is the mother of invention." As investors continue to look for liquidity, there will be alternatives that are suggested and potentially launched. From a sponsor standpoint, it is important for both advisors and preferred securityholders to know that we are working toward a quick and marketable solution while avoiding exploitative proposals that look to prey upon our financial advisor customers and their clients.
The auction rate preferred secuities remain dollar good. The current situation was brought upon by a liquidity event and is not credit-related in any way. Ratings remain consistent and strong. If we pursue refinancing, the securities will be redeemed at par, not at a discount. We understand your frustration over the past two weeks but want to make it clear that we are working toward a solution that will support your continued confidence in Calamos, as well as the general closed-end fund market.
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.