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BlackRock Expects Securities Auctions to Fail

Asset manager BlackRock said Monday it expects auction-rate securities auctions to continue to fail, given roiling markets, and said it would explore ways to help its fund shareholders who are suffering due to the lack of liquidity.

Interest rates for these long-term bonds, called auction-rate preferred securities (ARPS), are reset periodically through an auction process. When auctions fail for these securities, their interest rates default to maximum levels, and can be as high as 20 percent.

BlackRock sponsors 66 taxable and tax-exempt bond funds, which utilize preferred leverage and have $9.8 billion in ARPS outstanding, the company said in a statement.

Auctions have failed recently because holders of these securities got spooked about potential trouble facing bond insurers, and wanted to sell, but buyers were hard to come by.

Institutional investors and wealthy individuals who snap up these securities have stayed away, as have the banks who issue ARPS and buy up unsold shares.

"Given the current market conditions, BlackRock assumes that auctions will continue to fail," the company said.

Morgan Stanley said last month that several auctions have failed, and warned investors they may not be able to sell their ARPS because there were no buyers.

Earlier on Monday, investors in auction-rate securities sued Deutsche Bank for allegedly selling ARPS as highly liquid, safe vehicles equivalent to cash or money market funds.

The proposed class action lawsuit claims investors have been unable to liquidate more than $300 billion in these securities since Deutsche Bank and other major broker-dealers withdrew support for the auctions at which interest rates are set.

BlackRock is examining several potential solutions for holders of these securities, including refinancing the ARPS and making them eligible for purchase by money market funds, the company said. It may also seek bank financing, lines of credit and other solutions to help investors.

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