Auction-rate blues persist at BlackRock & Nuveen__»

June 16, 2010

For most everyone other than the investors who hold them and the entities that issued them, the auction-rate securities mess seems long past. For investors and issuers, far from it.

Now, some investors are widening one of the the latest fronts in the struggle: Proxy battles. Yesterday, two filings show some investment managers are still fighting the fight, including with a push to seat representatives on the boards of closed-end funds that used auction-rate preferred shares to leverage their returns.

The saga of auction-rate securities is too long and sad to recount in full here. The short version: Widely marketed to investors as a higher-yielding alternative to cash and money-market accounts, auction-rate securities were essentially debt with interest rates set each week or month by Dutch auction: Investors would bid the lowest rate they were willing to accept, and borrowers would ultimately pay a just high-enough rate to raise the funds they wanted.

All well and good until the auctions started failing en masse around early 2008. Among those caught in the vise: James B. Stewart, the SmartMoney columnist and Pulitzer Prize-winning author of Den of Thieves, who gave a pretty good rundown at the time.

Today, with lawsuits flying, some investors are taking a different approach and trying to seat their own representatives on the fund boards. One of the filings yesterday came from Karpus Management, a Pittsford, New York, investment adviser, and Bulldog Investors, another activist fund. As the Karpus / Bulldog Group put it in a filing about BlackRock MuniHoldings New York Insured Fund (MHN):

“Now that the auction process has been frozen for over two years, preferred shareholders must rely upon their Board, more than ever, to address this matter, return their capital and protect their interests. We are disappointed that the Funds have not publicly announced any intent to consider providing liquidity to its auction rate preferred shareholders. As preferred shareholders, we therefore do not feel that we are receiving adequate representation from the existing designated preferred share directors—”

Meantime, Bulldog filed another SC 13D (aka, a “general statement of acquisition of beneficial ownership”) on the Neuberger Berman Real Estate Securities Income Fund (NRO), noting that an affiliate held 16.62% of its preferred shares and “intends to contact management to discuss refinancing the auction rate preferred stock.”

It’s not the first time some of these investors have sought to use their shareholder clout. Last summer, Karpus said it planned to nominate to another fund’s board the same two directors it has put forward at BlackRock’s fund, and the fund offered to buy back outstanding preferreds, a Dow Jones Newswires piece reported. (Sorry, no link available.) Late last year, Karpus turned up the heat on another fund as well.

Given that the investors own significant chunks of the preferred shares issued by the funds they’re pressuring, we’re not too surprised that they sometimes get results. Whether it works with BlackRock and Nuveen remains to be seen.

Image source: Meredith Harris via Flickr

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