Nuveen looks to refinance municipal bond funds' auction-rate preferreds

By Jennifer Chiou

New York, March 12 - Nuveen Investments, Inc. announced that it is seeking to restructure the leverage of the 100 Nuveen closed-end funds that have issued auction-rate preferred stock (ARPS), including the municipal bond funds.

The Chicago-based provider of diversified investment services to institutional and high net worth investors said that it has arranged new debt financing to refinance a substantial portion of its taxable funds' ARPS and is in discussions with market participants regarding additional financing.

The company noted that it believes the best solution for the municipal bond funds would be to refinance the ARPS with a new form of preferred stock that includes a put feature, variable-rate demand preferred stock. Nuveen is working with its banking partners to develop the new preferreds.

Refinancing the funds' ARPS with variable-rate demand preferreds is contingent on finding third parties willing to provide put commitments at a reasonable cost as well as other factors, the company added.

By the end of March, Nuveen said it intends to begin announcing ARPS refinancings for specific taxable funds. If it can obtain put commitments for the variable-rate demand preferreds, the company plans to begin refinancing some of the municipal bond fund ARPS within two to three months.

"We understand the uncertainty that our closed-end fund shareholders have faced as a result of the unprecedented auction-rate market failures of the past several weeks," John Amboian, chief executive officer of Nuveen Investments, said in a news release.

"We are seeking to do two things: first, reduce the relative cost of leverage - which has increased due to this historic turmoil in the auction-rate market - by replacing ARPS with various forms of debt and other leverage, including potentially a new form of preferred stock; and second, restore liquidity at par for auction-rate preferred shareholders."

The company added that the municipal bond funds may consider using debt leverage temporarily to refinance a portion of their ARPS if the cost of debt leverage can enhance common shareholders' returns.

Nuveen said it also may refinance a portion of the ARPS by creating tender option bonds from certain municipal bond funds' portfolios. Tender option bonds are derivative securities created from fixed-rate bonds through a trust arrangement that effectively creates financial leverage within a bond portfolio.

Nuveen sponsors 120 closed-end funds, of which 100 are leveraged and have a total of $15.4 billion in ARPS outstanding. Of these 100 leveraged funds, 13 are taxable funds that invest in equities, government and corporate debt, or combinations and have $4.3 billion of ARPS outstanding, and 87 are municipal bond funds that invest in municipal bonds and have $11.1 billion in ARPS outstanding.

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