what are the implications of the below from an investor perspective? Once again I feel like a completely worthless tool. Is the issue basically that the cost of leverage will increase dramatically there by decreasing returns? A CEF I own has… announced that it intends to refinance up to $240 million of its outstanding auction market preferred shares (“AMPS”). NRO’s Board of Directors has approved a financing arrangement with a major unaffiliated financial institution that will enable NRO to redeem the AMPS at a price equal to the per share liquidation preference plus any accumulated and unpaid dividends. Subject to final documentation and satisfaction of the notice and other requirements that apply to AMPS redemptions, the Fund anticipates that it will be able to redeem up to 50% of its outstanding AMPS.
AMPS were what the fund used for leverage. They issued the AMPS in exchange for cash from investors who are more risk averse than the regular fundholders. The AMPS holders get a lower interest rate and they have a lot of market priced collateral (the fund). It’s just leverage. It’s like a regular margin account except they use the public & the AMPS market instead of a bank. They are usually fixed price securities but the interest rate on them was determined at a weekly or monthly auction. Many of these type securities got frozen up in the liquidity crisis. This news is probably not a big deal but it depends on the terms of the AMPS they’re refinancing. Instead of using the public markets for their leverage, they’ll be using a bank line. If it took them this long to refinance them then they were probably very favorable to the fund (all the stuck AMPS holders were getting a low interest rate). Whatever new terms they get might not be as good as their AMPS.