More investors are looking to sell illiquid auction rate preferred securities issued by closed-end mutual funds even though in many cases, they must sell at hefty discounts.
More investors are looking to sell illiquid auction rate preferred securities issued by closed-end mutual funds even though in many cases, they must sell at hefty discounts.
The Restricted Securities Trading Network, an online trading platform for institutional and accredited investors interested in buying and selling restricted securities and other illiquid assets, has seen an increase in the number of deals involving ARPS, said Barry Silbert, chief executive of Restricted Stock Partners of New York, which operates the website.
"Things are really picking up," he said.
The network is facilitating be-tween 40 and 50 transactions a week, Mr. Silbert said.
That isn't bad considering that ARPS weren't even traded on the platform until March 3, soon after auctions of preferred securities began to fail.
The network is believed to be the only secondary market for the $330 billion asset class.
But before investors rush out to sell their ARPS on the network, they might want to think about the consequences.
ARPS are selling at a 5% to 15% discount, Mr. Silbert said.
And while it doesn't cost anything to put ARPS up for sale, when a sale is reached, the network receives a 1% commission from both the buyer and the seller, he said.
GOOD DEAL?
At least one broker whose clients own ARPS said that it isn't a great deal.
"I'm telling clients not to sell, because we will have a solution shortly," said an East Coast broker with Merrill Lynch & Co. Inc. of New York, who asked not to be identified.
Three closed-end-fund advisers in particular — BlackRock Inc. of New York, Eaton Vance Corp. of Boston and Nuveen Investments Inc. of Chicago — have plans to create ARPS structured in such a way as to make them available to money market funds.
The hope is that money funds will buy the proposed securities — intended to replace established ARPS — providing liquidity to what has become an illiquid market.
Investors stuck in ARPS would finally be able to cash out at par value.
It is a great idea in theory, but some money fund insiders have raised doubts about whether money funds will rush to buy restructured ARPS.
Considering the amount of effort that the closed-end-fund industry is expending to resolve the crises, however, it seems highly unlikely that a comprehensive solution won't be hammered out, said Cecilia L. Gondor, executive vice president of Thomas J. Herzfeld Advisors Inc., a closed-end-fund specialist in Miami.
Close-end-fund advisers have already made some progress, she said.
As of July 4, such advisers had redeemed, or announced plans to redeem, 32.6% of the outstanding ARPS, Ms. Gondor said.
"We feel the industry has come together and been proactive in doing something," she said.
That is one reason why her firm has used the network to buy ARPS, Ms. Gondor said.
While the rest of the world sits and waits for closed-end-fund advisers to come up with a solution, "we get a slightly higher interest rate," she said.
Mr. Silbert, however, said that he is betting that a comprehensive solution won't come for a while.
"There are some fund families that have announced redemptions," he said.
That has caused discounts to narrow in some cases, Mr. Silbert said.
But there are still billions of dollars in illiquid ARPS outstanding, he said.
"While real efforts are under way to redeem all or part of those ARPS, it will take a while for that to happen," Mr. Silbert said.
E-mail David Hoffman at dhoffman@investmentnews.com.
