Nuveen gets $1.75 billion liquidity backstop to refinance auction-rate preferreds with new type of preferreds

By Angela McDaniels

Tacoma, Wash., May 21 - Nuveen Investments, Inc. said it received an initial commitment of up to $1.75 billion for potential issues of variable-rate demand preferred shares, which would be used to replace the auction-rate preferred shares issued by Nuveen municipal closed-end funds.

The commitment is from a "major financial institution," according to a company news release.

Variable-rate demand preferreds are a new form of preferreds and include an unconditional put feature. Nuveen said this feature could make the instruments attractive to money market funds, which cannot currently invest in auction-rate preferreds, and to other institutional investors.

The company first announced plans in March to refinance the auction-rate preferreds, which are used as leverage in the funds.

On Wednesday, Nuveen said another major financial institution has agreed to act as remarketing agent for an initial series of variable-rate demand preferreds (VRDP). The remarketing agent would set the dividend rates on the preferreds and match buyers and sellers on an ongoing basis.

"Arranging for a liquidity backstop and a remarketing agent for the new VRDP are important milestones in our efforts to address the ARPS challenge, which began in February and continues to frustrate many investors and their financial advisors as well as issuers of ARPS," executive vice president Bill Adams said in the release.

Nuveen noted that the variable-rate demand preferreds approach to refinancing auction-rate preferreds in municipal closed-end funds could, if successful, also be used with taxable funds.

The company believes an initial issuance of variable-rate demand preferreds could be completed within 30 to 60 days. The issuance would be subject to approval by the funds' board of trustees.

Expanded use of tender option bonds planned

Nuveen said it also plans to use tender option bonds to help refinance auction-rate preferreds in its municipal closed-end funds.

Tender option bonds are floating-rate securities issued by trusts into which a fund has deposited municipal securities, according to the release. The proceeds derived from the issuance of tender option bonds can be used to refinance auction-rate preferreds.

The company said many of its funds already use tender option bonds as a portfolio structuring and duration management tool. Nuveen has been conducting a fund-by-fund analysis to identify opportunities to expand the funds' use of tender option bonds as an alternative form of leverage.

Subject to board approval, Nuveen said it expects that by early June some funds will begin to announce the amount of auction-rate preferreds they expect to redeem using tender option bonds as well as the potential timing of any redemptions.

Auction-rate preferreds refinancings using tender option bonds may not be as feasible for smaller funds and some state funds where the availability of bonds eligible for creating tender option bonds is limited, the release noted.

Nuveen is a Chicago-based provider of diversified investment services to institutional and high net worth investors.

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