The market for Auction Rate Securities remains frozen but has seen some progress as municipal borrowers like California and Florida schools converted their auction rate securities to fixed rate debt this week and the Port Authority of NY announced they would redeem $200MM next month.
Auctions for both single issuer Auction Rate Securities and the “muni preferreds” issued by Closed End Funds continue to fail to clear the available supply of sellers.
Mutual fund companies are making efforts to communicate with investors regarding the implications of failed auctions for preferred holders as well as common holders. While some of the Q&A sessions between the fund companies and investors provide little direction, I believe the fund companies are working on solutions for investors and are willing to work collaboratively to identify some options to resolve the current crisis.
Individual "retail" investors hold approximately $60 billion of muni preferreds, or about 20% of the ARS market.
Although the timing of a resolution is still uncertain, I do expect an announcement to occur very soon, as pressure is mounting on all fronts to get this issue resolved.
The fallout from all this has yet to be quantified. No doubt, adding more leverage used to boost yields on closed end funds is not an option at this point.
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