Nuveen Investments announced the pricing and placement of over $500 million of its new Variable Rate Demand Preferred (VRDP) shares issued by closed-end funds in a series of four private placement offerings. Proceeds from the offerings "are expected to be used ... to redeem all of the fund's outstanding auction-rate preferred shares (ARPS)." The closed-end funds placing VRDP shares include: Nuveen Dividend Advantage Municipal Fund 2 ($196 million); Insured Premium Income Municipal Fund 2 ($219 million); Insured California Tax-Free Advantage Municipal Fund ($35.5); and, Nuveen Insured New York Dividend Advantage Municipal Fund ($50 million), says a series of press releases by Nuveen.

Nuveen says, "The VRDP was offered only to qualified institutional buyers, as defined pursuant to Rule 144A under the Securities Act of 1933" and that the offering is expected to close on August 7, 2008. "The VRDP shares will include a liquidity feature that allows holders of VRDP to have their shares purchased by a liquidity provider in the event that sell orders have not been matched with purchase orders in a remarketing. The liquidity feature is provided by Deutsche Bank AG.... VRDP dividends will be set weekly at a rate established by a remarketing agent."

At least one money market fund family has begun buying these new securities, which are intended to take the place of, and ease the pressure on, the beleaguered auction-rate preferred securities (ARPS) sector. Federated Investors CEO Chris Donahue said on the company's recent earnings call, "We have been working with many of those providers in order to make sure that the structures are compatible with 2a-7, and ... we would be enthusiastic to purchase those on our side. Our lawyers, PMs, and analysts have been working with the various people." He added, "Don't forget that the whole existence of the auction rate securities market was a way to get away from money funds."

Look for more about this topic in the imminent August issue of Money Fund Intelligence where we interview Federated's tax-free money fund CIO Mary Jo Ochson. See also MarketWatch's "Federated Municipal Closed-End Funds Announce Tender-Option Bond Refinancing for Preferred Shares".

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