NEW YORK, Nov. 19 /PRNewswire-FirstCall/ -- Cohen & Steers announced today that its closed-end funds will redeem $118 million of their auction market preferred securities (AMPS), bringing the total amount redeemed to $2.267 billion. The newly announced redemptions will be at par value and on a pro rata basis in the amounts indicated below.*
AMPs (Auction Market Preferreds) were a way of raising capital; the AMP market was one of the first to freeze up during the current crisis. C&S used AMPs as a way to borrow money, so the redemption is the process of returning that capital to those it was borrowed from.
If they were able to raise that money through banks at favorable rates, it is actually a good thing in this market.
The main issue, I suppose, is to find out where the money came from to do the redemption.
Here is a commentary that roughly explains the situation:
C&S has actually been doing a fairly good job of getting money back to the parties it was borrowed from. I have heard worse from those who held AMPs from Nuveen, but I haven't verified it, and thus it is merely hearsay.
The AMPS are the source of money originally used to leverage this fund, it's kind of perverse that the shareholders got most of the negative effects of the leverage on the way down but will get none of it on the way back up.
I don't see why they couldn't have just deleveraged by selling stock and holding it for even cheaper purchases later, I guess it's part of the problem of the incentives of chasing relative performance (i.e. my gut tells me to go to high cash level but none of my competitors are doing it and my biggest concern is not underperforming the other funds, ie I go to cash and then prices start going up).
Anyway, here's the post from ddavid from October describing the source of funds for AMPS redemptions, if he's not an insider I have to assume he got the info from IR.
I'm guessing this LOC was locked in a long time ago.
"RQI is buying/redeeming the Preferred Securities(57% of them) with the new Bank of America Line of Credit. RQI is not selling assets (REITs) to fund the redemptions. The cost of the LOC is significantly less than the Preferred Securities at the penalty rate, which they have been paying since 2/2008 (ARPS became locked)."
Anyway, this is a brutal market, makes previous bear markets I've lived through since 97 look like child's play.
I don't own RQI but a small amount I set aside in CMGRX in an UTMA account for my daughter's education has been annihilated. Sometimes the tax regs are a good thing, if I could have gifted more than 12k tax free to that account I probably would have.
i would call investor relations for more details, but apparently there's some penalty clause related to the preferred shares which means that continuing to pay their dividends is more expensive than RQI's cost of capital to obtain money to redeem them..
not sure who to believe anymore, but there's a reason they call them preferred, getting redeemed at par is an incredible boon to their holders, my jp morgan preferred are at 19.55 today, par is 25, for example
As we know, this is a leveraged fund. The fund has borrowed money, and invested that money, not unlike when you buy stock on margin.
So, they are paying back some of that borrowed money. They are de-leveraging. It's a painful, costly scenario that has caused them to do this, and it is one indicator of the terrible situation of RQI.... The leverage percentage of this fund must be out the roof, now. I haven't calculated it, but it must be at least 200%. So if the fund is levered 200%, then when the stock market drops 5%, it's Net Asset drops 15%, and presumably the stock drops around 15% as well...