The leveraged closed-end funds that issued auction-rate securities are facing a rising risk of being forced to de-lever, according to a report from Moody’s Investors Service. The report concludes, however, that the heightened de-leveraging risk alone should not pressure the corporate ratings of many of the affected asset managers.
For the vast majority of firms, closed-end funds represent a small percentage of their overall business. However, Moody’s warns that the ARS overhang threatens to have secondary implications for entire fund families if managers cannot ultimately resolve the issues.
“Refinancing outstanding auction-rate securities in the context of a very challenging financial market remains unlikely in the near term,” said Moody’s senior credit officer Matthew Noll, “De-leveraging risks are further exacerbated by the severe downturn in asset valuations, which are impacting the funds’ coverage ratio tests.”
Since the collapse of the ARS market in February 2008, less than one-third of the approximately $64 billion of ARS issued by closed-end funds has been refinanced. Roughly 50 asset management firms managed leveraged closed-end funds that utilized the auction-rate markets as of the beginning of 2008. Of this group, the closed-end funds of Nuveen, Eaton Vance, and BlackRock accounted for over 45% of total ARS issuance, according to Moody’s
To date, the only rating action on a corporate-level rating taken by Moody’s in conjunction with the ARS market disruption has been the change in Nuveen’s outlook to negative from stable at the end of February.
Since the ARS markets froze, closed-end fund managers have weighed several alternatives for redeeming ARS. Three proposed securities eligible for purchase by money market funds could ultimately serve to refinance outstanding ARS. Developments in the credit crisis and the equity market crash that ran through September and October have substantially slowed an already lengthy process, Moody’s said.