A Note from Duff & Phelps on Preferred Stock Refinancing
August 27, 2008
Chicago, IL
Duff & Phelps Investment Management Co. has employed leverage in the closed-end funds it advises (the “Funds”)1 since shortly after their initial public offerings. The form of leverage currently used by all of the Funds is preferred stock, including remarketed preferred stock (RP) and auction preferred stock (APS). The purpose of leverage is to enhance the net income available for distribution to common shareholders.
We have been seeking ways to mitigate the impact on preferred shareholders of the illiquidity in the RP and APS market without materially affecting the funds' net income available for distribution. While we have explored various alternatives, including other forms of preferred stock and borrowing from financial institutions, in each case we have concluded that they were economically or structurally deficient. Therefore, we have not been able to recommend a suitable solution to the independent Boards of the Funds.
We believe a successful solution must serve three guiding principles.
First, a successful solution must not materially disadvantage the common shareholders and their ability to benefit from the use of leverage.
Second, the solution should be long-term oriented in nature. A short-term financing solution that provides near-term liquidity but no assurance of long-term funding could expose the Funds’ shareholders to adverse changes in the market.
Third, a feasible solution should not lead to an increase in investment restrictions, an encumbered investment process or a reduced pool of investment alternatives.
We at Duff & Phelps Investment Management Co. continue to monitor the situation and to seek potential solutions that meet our guiding principles. Both Duff & Phelps Investment Management Co. and its parent company, Phoenix Investment Partners, Ltd., stand ready to work with the broker/dealer firms involved in the original issuance of the preferred stock, as well as with other capital market participants, to craft a feasible solution. Once identified, we are prepared to evaluate and to recommend a sustainable alternative to the Board. Until that time, we will continue to meet our commitments to the preferred shareholders.
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