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Cohen & Steers Reit and Preferr Message Board

  • Stock_Aficionado Stock_Aficionado Feb 16, 2008 8:56 AM Flag

    Nobody Panic (Part 1: AMPS Explained)

    Ok. First of all, take a deep breath and relax. At this point, it’s not as bad as you might think. Yes, the AMPS market has virtually seized, and this means (for the moment) institutional buyers for AMPS are no longer interested in purchasing AAA-rated paper (S&P) issued by closed-end funds. But that does not mean RNP is necessarily in trouble, so long as LIBOR rates remain low. And that’s the benchmark for continued liquidity near term.

    AMPS are typically auctioned in a secondary market in which large institutions bid for this high quality paper. However, given the increased demand for capital by these institutions, it seems they have better use for their money at this point in time. Historically, these auctions have allows closed-end funds to secure rates below the “applicable rate”. An applicable rate is a fancy term for a default rate. For RNP, the default rate for issued AMPS is LIBOR plus 125 basis points.

    LIBOR stands for London Interbank Offered Rate. It's the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in the Wall Street Journal and other publications. In general, its changes have been smaller than changes in the prime rate.

    A year ago, the LIBOR rate stood at roughly 5.40%. That means the default rate (or applicable rate) for RNP preferred securities would have been 6.65%, which is hardly attractive from a leveraging standpoint. However, in the AMPS market, these preferred securities were sold to institutions at much more favorable rates to the fund. Naturally, with more favorable rates for preferred securities, the fund was able to increase (or maintain) sizeable dividends for common shareholders.


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