Eaton Vance to redeem $1.6 bln of preferred shares

BOSTON (Reuters) - U.S. money manager Eaton Vance Corp (EV.N)said on Monday it was redeeming nearly a third of the preferred shares issued by its closed-end funds, offering relief to owners of the shares who have been unable to sell them because of the credit crisis.

Eaton Vance, the third-biggest closed-end fund firm, said three of its closed-end equity funds would redeem the preferred shares they have issued and the funds have secured about $1.6 billion in financing for the purpose.

"The funds expect to redeem in full their outstanding APS (auction preferred shares)," the company said in a statement. Eaton Vance has 29 closed-end funds that have about $5 billion of preferred shares outstanding, it said. Overall, the firm has about $31 billion in closed-end fund assets.

Eaton Vance's move comes after UK money manager Aberdeen Asset Management (ADN.L) announced last week that one of its U.S. closed-end mutual funds is redeeming its preferred shares worth about $30 million.

Closed-end funds, which issue a fixed number of common shares and trade like stocks on exchanges, have for about two decades issued preferred shares in order to borrow and boost their returns. According to industry numbers, U.S closed-end funds have about $64 billion in preferred shares outstanding.

These shares trade at par and their dividends are reset in auctions held every seven to 35 days. However, over the past month, the auctions have failed as institutional and wealthy individual investors who usually snap up these shares have stayed away due to growing concerns about the credit markets.

Besides Eaton Vance, other major closed-end fund issuers such as Nuveen Investments and BlackRock Inc (BLK.N) saw failed auctions in recent weeks.

PENALTY RATES

Banks that normally step in to buy the unsold preferred shares also have backed out because they are already saddled with other kinds of securities whose values have tumbled in the credit crisis.

Because of the failed auctions, the owners of the preferred shares are unable to sell them. Money managers are then required to compensate the preferred shareholders for the lack of liquidity by paying a higher penalty interest rate.

However, in recent weeks the penalty rates have been only slightly higher than the market rates because of the general downward pressure in interest rates. Due to the inability to exit these securities and the low rates being paid on them, the holders of the preferred shares are putting pressure on firms to redeem them.

Despite the higher penalty rates, the preferred shares are still a cheaper way to borrow for many funds and thus firms are reluctant to redeem them.

Nuveen, the biggest closed-end fund company, and BlackRock, the second largest, declined to comment on whether they would redeem their funds' preferred shares. BlackRock spokesman Brian Beades said the company does not manage leveraged equity closed-end funds.

"There's no all-inclusive answer for this problem. Each fund is going to have to look at the economics of their situation and determine what's the appropriate solution," Cecilia Gondor, executive vice president of Thomas J. Herzfeld Advisors, specialists in closed-end funds, said.

Eaton Vance said it was working on other alternatives for providing liquidity to the owners of preferred issued by the other closed-end funds. Like Aberdeen, it said the funds will change their method of leverage to debt after the redemption.

"The organization with whom we did this transaction was only interested in doing it with our equity funds and not with any of our others," Jonathan Isaac, a vice president at Eaton Vance, said.

He declined to name the institution but said the debt deal was a better one for the funds than paying the penalty rates, which were 4.38 percent on average.

Eaton Vance shares closed down 4.1 percent at $28.70 on Monday before the announcement and amid a weak overall market.

(Editing by Carol Bishopric)