I have been researching this issue of the demand letter related to ARPS redemptions at par value, and trying to get an understanding of what this means. I found cursory mention of the news item in a seekingalpha blog wherein the poster blew it off as "a nuisance lawsuit designed to collect legal fees". Could somebody explain this in simple terms, and also comment upon whether or not this is a serious/frivolous legal action and if there is any risk of financial consequence to NCV common shareholders.
I heard it's one law firm sending demand letters to all these funds.
Here'a a link to today's Wall St. Journal article about it:
Doesn't look like the link worked (as usual on here). But google "Auction Rate Buybacks Chilled" and you can access it that way.
As I mentioned above, it's complicated, but the demand letters are not trying to force redemption of ARPS; they are trying to stop it, on the theory that the funds' redeeming ARPS at a low price costs the shareholders money.
Seems to me that any legal fees would be to defend the fund MANAGERS, and not the fund, and hence would not be FUND expenses. Gates..I read the googled stuff and it appears to me that the fund managers give little legal credence to these letters and my sense is that we are watching a tempest in a tea pot.
I still say that the worst case scenario, which I do not believe will ever come to pass, would be the forcing of ARPS redemption, which would increase the cost of leverage and hence lower the yield. This guy will lose no sleep over it :-).
Yes, it appears some shareholders are not happy with the redemption of ARPS.
But, even if they win any legal battle, the money that they get will come from the fund manager, not from the fund itself.
So, for the rest of us and the fund's price, it should not have any consequence, at least in theory.
The managers have been accused of fiduciary breach so, if found guilty, they will have to pay with their own money, not with the fund's money.
Do you agree?
I tried some links but they did not work on here. I just googled "demand letters ARPS" and the Nuveen news items explain it the most throughly. I found quite a few sources. Nuveen got 27 letters, and Hancock and Cohen &
Steers got some also.
Herzfeld.com requires a trial subscription to read their report.
I just re-read the article about it in the Herzfeld Report. It seems to be the opposite. As I understand it, the complaint is about past redemption of ARPS at the wrong time, i.e., a low point in the markets. Many funds would have recovered better if they had left their leverage in place for the 2009 bull run, but they deleveraged at the lows. Some shareholders may think this is why their funds are still selling at $10 - $15 when they IPO'd at $20.
Many funds probably had to deleverage due to asset coverage requirements, though.
I'm assuming that these demand letters are trying to force redemption of ARPS, which I'm not aware of their ever doing other than that required to bring their leverage down to required levels. Were this to be possible, then I'm assuming that their next choice for borrowing would be more expensive, and hence my comment.