Auction Rate Securites

>> Back

Auction Rate Securites

Merrill Brokers Press Pimco, BlackRock to Buy Auction-Rate Debt

August 20, 2008

By Bradley Keoun and Christopher Condon

Aug. 20 (Bloomberg) -- Merrill Lynch & Co. brokers are pressing fund managers Pacific Investment Management Co. and BlackRock Inc. to buy back auction-rate securities, aiming to speed up client bailouts in the frozen market.

More than 300 brokers have e-mailed Pimco saying its executives may ``no longer be welcome in our offices'' unless they redeem the securities, according to Erick Ellsweig, a Merrill financial adviser in North Carolina who spearheaded the e-mail campaign. Will Fuller, head of distribution for Merrill's
U.S. brokerage arm, wrote to BlackRock on Aug. 15 saying its failure to offer redemptions in the past two months has created "dissatisfaction in our financial advisers and clients."

Merrill's brokers, who make up the biggest U.S. financial advisory network, say they're trying to help clients stuck with more than $10 billion of securities in the $200 billion auction-rate market. Pimco, which manages the world's biggest bond fund, and BlackRock, the largest publicly traded U.S. fund manger, used the market to finance their closed-end mutual funds, and Merrill brokers sold the investments to its customers.

"The brokers at Merrill are very upset about the lack of access to capital for their clients, and they have been rattlingthe cage," said Geoffrey Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island.

The auction-rate market seized up in February with $330 billion in securities when the credit crisis prompted Wall Street firms to stop supporting the periodic auctions in which the securities were bought and sold. New York Attorney General Andrew Cuomo has accused Merrill and other brokers of improperly peddling them as investments that were as liquid as cash. Merrill has said it's cooperating with government probes.

Benefiting Merrill
Five banks, including Citigroup Inc. and UBS AG, have reached settlements with Cuomo and other regulators, agreeing to pay $360 million in fines and repurchase about $35 billion of auction-rate securities. Merrill, the third-biggest U.S. securities firm, has offered to buy back $10 billion starting in January, a proposal Cuomo said was inadequate.

Purchases of auction-rate securities by BlackRock and Pimco would benefit Merrill by reducing the amount of the investments it may have to repurchase.

"The only thing we care about is getting our clients redeemed as quickly as possible,'' Ellsweig, who has worked at Merrill since 2001, said in an Aug. 16 e-mail in response to a request for comment by Bloomberg News. Bloomberg obtained copies of the correspondence between Merrill, BlackRock and Pimco, which was confirmed by officials of the companies.

BlackRock Connection
"This was a grassroots effort reflecting the opinion of a group of financial advisers,'' Merrill spokesman Mark Herr said in an e-mailed statement. "The firm continues to work with all interested parties at resolving the liquidity challenge caused by the unprecedented freezing of the auction-rate securities
market."

Merrill, based in New York, has a "long track record of working with Pimco and BlackRock," he said. The flare-up with New York-based BlackRock is notable because Merrill owns 49 percent of the firm and is the largest distributor of its funds. BlackRock has a "leadership position within our company," Fuller wrote in the e-mail to BlackRock President Robert Kapito, so it faces higher expectations from Merrill's brokers.

"We continue to work constructively with all major market participants to address the unprecedented issues in the auction-rate market," said BlackRock spokesman Brian Beades in an e-mailed statement.

Closed-End Funds
Closed-end funds, which trade on exchanges, sold auction-rate securities to finance asset purchases and increase returns for common shareholders. The funds had $64 billion outstanding when the market froze, according to research firm Thomas J. Herzfeld Advisors Inc. in Miami.

Fund managers including Nuveen Investments Inc., Eaton Vance Corp. and BlackRock have redeemed or scheduled the redemption of $24.1 billion of auction-rate preferred shares, according to Herzfeld, which specializes in closed-end funds.

Following the Cuomo announcements, some funds dropped plans to assist in the buybacks. On Aug. 14, three funds managed by Hartford, Connecticut-based Phoenix Cos. announced they were suspending efforts to obtain bank credit lines to finance auction-rate redemptions. Daniel Sontag, who oversees Merrill's U.S. retail division, wrote in a memo last week that the firm's buyback offer doesn't let closed-end funds off the hook. "We fully expect" fund managers to "work with us even more actively," he wrote.

Redemptions
Nuveen, which had $15.4 billion of the securities outstanding as of February, has announced redemptions of $5.53 billion, or 36 percent, according to Herzfeld. Eaton Vance's buybacks total $3.8 billion, or 76 percent. BlackRock's repurchases stand at $2.5 billion, or 25 percent. BlackRock hasn't announced any redemptions since June 2, Merrill's Fuller wrote in the memo to Kapito.

"We fear that our financial advisers view BlackRock as conspicuous by its absence,'' Fuller wrote.

Munich-based Allianz SE, which owns Pimco, hasn't redeemed any of its $5.3 billion of outstanding auction-rate securities, according to Herzfeld.

Pimco, based in Newport Beach, California, is the home of manager Bill Gross's $130 billion Total Return Fund, the world's biggest bond fund. On Pimco's Web site in February, Gross called the unraveling auction-rate market Wall Street's latest twist on "Old Maid" -- a card game in which players try to avoid getting stuck with a lone queen.

"That really annoyed me,'' Ellsweig, 41, who's based in Greensboro, North Carolina, said in the Aug. 16 e-mail to Bloomberg.

E-Mail Barrage
On Aug. 7, Ellsweig sent an e-mail to Tammie Arnold, co-head of Pimco's product management group, stating that "Pimco is the only major partner that has not had one single redemption of their auction market-preferred securities."

Ellsweig asked fellow Merrill brokers to send similarly worded e-mails to Pimco, and at least 300 did, he said.

In an Aug. 8 letter to Ellsweig, Arnold wrote that "the best we can do is to report that we will continue to work very hard to find a solution."

Any redemption has to avoid imposing "unfair costs" on holders of common shares in the closed-end funds, she wrote. In an e-mailed statement to Bloomberg, Pimco said it is ``looking at solutions that are consistent with our fiduciary duty."

BlackRock has applied for permission from the U.S. Securities and Exchange Commission to replace its auction-rate preferreds with a new type of financing, Liquidity Enhanced Adjustable Rate Securities, or Lears, Kapito wrote last week in a letter last week to an advisory council of Merrill financial advisers.

Pursuing Solutions
Kapito, 50, wrote that the firm hopes to announce ``our proposed solution and any additional redemptions within the next 30 to 90 days."

"Contrary to your suggestion that BlackRock has allowed the liquidity problem to 'age,' BlackRock has been actively pursuing potential solutions," Kapito wrote.

The credit crunch remains in full swing, and it hasn't been easy to find banks willing to provide backup financing for the Lears, Kapito wrote.

"The normal sources of liquidity, including broker-dealers such as Merrill Lynch, Morgan Stanley and Lehman Brothers, are not available to us as they are dealing with their own well- publicized liquidity issues," Kapito wrote.

 

--With reporting by Jeremy R. Cooke and David Scheer in New York. Editors: William Ahearn, Otis Bilodeau.

To contact the reporters on this story:
Bradley Keoun in New York at +1-212-617-2310 or bkeoun@bloomberg.net;
Christopher Condon in Boston at +1-617-210-4633 or ccondon4@bloomberg.net.

To contact the editors responsible for this story:
Otis Bilodeau at +1-212-617-3921 or obilodeau@bloomberg.net;
Larry Edelman at +1-617-210-4621 or ledelman3@bloomberg.net.

 

 

 

RW Smith believes the information shown herein was obtained from a reliable source, but makes no representation and no guarantee as to its accuracy or completeness. RWS shall not be responsible for the consequences of your use of the information. Securities identified may be subject to additional call features, sinking funds, project features, or other factors that may affect market value. You must do your own independent research prior to submitting any bid.

© Copyright 2010 RW Smith • SEC • FINRA • Disclosure