As a means of exiting the auction-rate securities market and seeking new alternatives for cost-efficient leverage, a handful of municipal closed-end funds are in the midst of launching new floating-rate products or relying on traditional tender-option bond programs to redeem their outstanding auction-rate preferred shares.

Historically, closed-end funds - which have a fixed number of shares and trade on a major exchange - gained leverage in the ARS market. For the first time in 20 years, auctions failed starting in mid-February after bond insurance companies began to have their credit downgraded. As auction rates reset higher, closed-end fund managers saw their cost of capital rise and liquidity collapse, and were left holding a reported $63.4 billion of preferred shares.

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