Morgan Stanley to refinance muni funds with TOBs
NEW YORK, Sept 29 (Reuters) - Morgan Stanley on Monday said 10 of its closed-end municipal funds will seek another round of refinancing to raise cash to redeem some of the auction rate securities previously used.
The $400 billion auction rate securities market collapsed this spring, another victim of the global credit crunch. The bank, in a statement, said that it was seeking the new financing because auctions for auction rate paper, at which this debt's interest rates are reset, were still failing.
A Morgan Stanley spokeswoman was not immediately available to give more details.
The bank's statement added that the funds will sell tender option bonds to refinance "up to an additional 20 percent of each fund's auction rate preferred shares leverage."
The new refinancing would be in addition to the "original 30 percent" that was announced in April, the bank said, adding that in July and August it also released information about $233 million of refinancing of the funds' auction rate preferred shares with tender option bonds.
Tender option bond programs finance long-term purchases of muni bonds by selling floating rate notes, often variable rate demand notes.
For much of this month, many of these leveraged programs have been selling long-term muni bonds because their borrowing costs spiked dramatically. This in turn has pushed the value of their long-term holdings down to levels that some muni experts see as bargains.
Morgan Stanley last week said it was helping some leveraged muni clients find substitute financing but some clients complained they were being forced to take back securities.
Short-term muni rates have spiraled with the higher rates seen with other benchmarks, including the London interbank offered rate, for the past few weeks as banks transform themselves into loan-averse, cash-preserving machines.
For example, rates for weekly variable rate demand notes hit 8 percent or higher last week. On Monday morning, some of this debt reset at slightly lower rates, but that was before Congress failed to enact the federal bailout. (Reporting by Joan Gralla; Editing by Gary Hill)
