Claymore Comments on Auction-Rate Preferred Securities Market
Published February 17th, 2008
The broad auction-rate preferred securities market has experienced some disruption in the past few months, but those disruptions have increased dramatically in recent days. The result has been an increasing number of failed auctions on many, if not all, auction-rate preferred shares (“ARPS”) linked to tax-exempt and taxable closed-end funds. We believe this increase in failed auctions is simply a liquidity issue and investors need to be aware that a failed auction is not a default nor does it require the redemption of a fund’s ARPS. Provisions in the offering documents of ARPS generally provide a mechanism to set a maximum rate in the event of a failed auction, and, thus, investors will continue to be entitled to receive payment for holding these ARPS.
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