Today, the Boards of Trustees for the following Morgan Stanley Closed-End Municipal Funds: Morgan Stanley Insured Municipal Trust (NYSE: IMT), Morgan Stanley Insured Municipal Bond Trust (NYSE: IMC), Morgan Stanley Insured Municipal Income Trust (NYSE: IIM), Morgan Stanley California Insured Municipal Income Trust (NYSE: IIC), Morgan Stanley Quality Municipal Income Trust (NYSE: IQI), Morgan Stanley Quality Municipal Investment Trust (NYSE: IQT), Morgan Stanley Quality Municipal Securities (NYSE: IQM), Morgan Stanley California Quality Municipal Securities (NYSE: IQC), Morgan Stanley New York Quality Municipal Securities (NYSE: IQN), and Morgan Stanley Municipal Premium Income Trust (NYSE: PIA), each a registered closed-end investment company (the “Funds”), approved the use of alternative sources of leverage which in turn will enable the Funds to redeem a portion of the shares of one or more series of each Fund’s outstanding auction rate preferred shares (“ARPS”). Specifically, the Board of each Fund approved the use of Tender Option Bonds (TOBs) to refinance up to 30 percent of each Fund’s ARPS leverage, subject to acceptable terms and the availability of municipal bonds and liquidity providers as set forth below. The Board of Trustees of each Fund believes that in light of the continued failed ARPS auctions, it is appropriate for the Funds to seek other sources of leverage to provide liquidity for ARPS shareholders while retaining the benefits of leverage for the common shareholders.
TOBs are derivative securities created by placing high quality municipal bonds into a trust arrangement and, in exchange, each respective Fund receives cash and a residual interest security (sometimes referred to as an “inverse floater”) issued by the trust. The trust then issues securities (sometimes referred to as “floaters”) which are purchased by third parties and which pay interest rates that generally reset weekly based on a short-term index rate. These floater securities, once purchased, can be tendered back by the holder to a liquidity provider at par. The Funds would continue to earn the interest from the bonds held by the trust, less the interest paid to the holders of the floaters and any fees associated with the transaction. Additionally, the Funds would use the cash received from the municipal bonds placed in the trust and from the issuance of the floaters, to redeem ARPS and/or for investment purposes.
The successful implementation and use of TOBs depends on a number of factors, including the availability of high-quality municipal bonds at certain yield levels to be transferred to the trust structure, the ability to secure liquidity providers for the put feature, and the general market demand for the short-term interest floaters issued by the trust. TOBs are subject to leverage risk and interest rate risk. A rise in short-term interest rates would result in an increase in the interest payable on the short-term interest floaters but a decrease in the income generated by the inverse floaters, thereby resulting in a decline in the income to the common shareholders, and possibly a decline in the overall yield and market value of each respective Fund’s common shares.
While the Board of each Fund has approved the use of this alternative form of leverage to redeem a portion of each Fund’s ARPS, there is no specific timetable for the redemption of the ARPS. The Funds anticipate that the redemption and refinancing of the ARPS will take place over a period of time, and the timing and amount of such redemptions for each Fund will be determined by the availability of acceptable terms on the TOBs, market conditions and the factors set forth above. If a Fund determines to redeem a portion of a series of ARPS, such redemption will be pro rata and a notice of redemption containing specific details with respect to a particular redemption will be issued.
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