Once again, we learned about a new SEC "no-action" letter impacting money market funds from Stradley Ronon Stevens & Young LLP Counsel Joan Ohlbaum Swirsky. The letter, entitled, "Acquisition of Auction Preferred Stock; Issuance of Liquidity Protected Floater Securities," "describes an approach developed by UBS to provide liquidity for auction rate preferred shares (ARPS) held by its clients," says Swirsky.
She tells Crane Data, "The approach involves creating trusts to purchase the ARPS, where the trust will thereafter issue securities to money market funds and others. The securities are called 'Floaters,' and they resemble in many respects the more traditional 'floaters' that money market funds purchase in the form of tender option bonds backed by municipal securities (rather than being backed by ARPS)."
Swirsky explains, "Auctions of ARPS have been failing since February 2008, and UBS AG and its affiliates have designed the new type of security (the Floaters) to promote the resumption of successful auctions. The Floaters would be interests in newly-created trusts that acquire ARPS and make payment to holders of the Floaters, based on payments received from the underlying ARPS. UBS envisions that the Floaters will be eligible for purchase by money market funds. Accordingly, by purchasing ARPS and selling Floaters to money market funds (and possibly others), the trusts may create a market for ARPS that will revive liquidity in the auction process."
She continues, "The Floaters will have a type of guarantee known as an unconditional demand feature ('UCDF'), and the UCDF could be provided by an affiliate of UBS. Under prior no-action letters, a guarantee on preferred shares was required to be from a non-affiliate of the issuer to permit a money market fund to rely on the credit quality of the guarantee to satisfy Rule 2a-7. The UBS no-action letter states that money market funds may rely exclusively on the credit quality of a guarantor in determining whether preferred shares subject to the guarantee meet Rule 2a-7's credit quality conditions, regardless of whether the guarantor is affiliated with or controlled by the issuer."
Finally, Swirsky adds, "The letter is third in a series that has been issued over the past few years that bear on restructuring ARPS. In 2002, the SEC staff issued a no-action letter to Merrill Lynch that opened the way for money market funds to purchase certain types of preferred shares, which normally would not satisfy the technical requirements of Rule 2a-7. The SEC staff imposed a number of conditions, a major one being that the preferred shares must be supported by an UCDF from a party unaffiliated with the issuer of the underlying preferred shares.... In 2008, Eaton Vance obtained no-action relief that ... broadened the description of a UCDF that could render preferred shares eligible for purchase by money market funds." (See our Crane Data News 6/16/08 "SEC Gives Eaton Vance No-Action Letter to Issue LPP to MMFs for ARPS".)
