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Securities and Exchange Commission (“Commission”).
Notice of application for an order under section 6(c) of the Investment Company Act of 1940 (“Act”) for an exemption from sections 18(a)(1)(A) and (B) of the Act.
Eaton Vance Floating-Rate Income Trust, Eaton Vance Senior Floating-Rate Trust, Eaton Vance Senior Income Trust, Eaton Vance Credit Opportunities Fund, and Eaton Vance Limited Duration Income Fund (each, a “Fund” and collectively, “Funds”).
Summary of Application:
Applicants request an order (“Order”) granting an exemption from sections 18(a)(1)(A) and (B) of the Act for a two-year period immediately following the date of the Order. The Order would permit each Fund to issue debt securities subject to asset coverage of 200% that would be used to refinance all of the Fund's issued and outstanding auction preferred shares (“APS Shares”). The Order also would permit each Fund to declare dividends or any other distributions on, or purchase, capital stock during the term of the Order, provided that any class of senior securities representing indebtedness has asset coverage of at least 200% after deducting the amount of such transaction.
The application was filed on June 10, 2008, and amended on July 2, 2008, July 29, 2008, and September 2, 2008.
Hearing or Notification of Hearing:
An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on October 22, 2008, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission's Secretary.
Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. Applicants: c/o Frederick S. Marius, Chief Legal Officer, Eaton Vance Management, 255 State Street, Boston, MA 02109.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Courtney S. Thornton, Senior Counsel, at (202) 551-6812, or Janet M. Grossnickle, Assistant Director, at (202) 942-6821 (Division of Investment Management, Office of Investment Company Regulation).End Further Info End Preamble Start Supplemental Information
The following is a summary of the application. The complete application may be obtained for a fee at the SEC's Public Reference Room, 100 F Street, NE., Washington, DC 20549-1520 (tel. 202-551-5850).
1. Each of the Funds is organized as a Massachusetts business trust and is a closed-end management investment company registered under the Act. Each Fund is advised by Eaton Vance Management (“Eaton Vance”) and has issued and outstanding a class of common shares and a class of one or more series of APS Shares. Start Printed Page 58692
2. Applicants state that the Funds issued their outstanding APS Shares for purposes of investment leverage to augment the amount of investment capital available for use in the pursuit of their investment objectives. Applicants state that, through the use of leverage, the Funds seek to enhance the investment return available to the holders of their common shares by earning a rate of portfolio return (which includes the return obtained from securities purchased from the proceeds of APS Share offerings) that exceeds the dividend rate that the Funds pay to holders of the APS Shares. Applicants represent that APS shareholders are entitled to receive a stated liquidation preference amount of $25,000 per share (plus any accumulated but unpaid dividends) in any liquidation, dissolution, or winding up of the relevant Fund before any distribution or payment to holders of the Fund's common shares. They state that dividends declared and payable on APS Shares have a similar priority over dividends declared and payable on the Funds' common shares. In addition, applicants state that APS Shares are “perpetual” securities and are not subject to mandatory redemption by a Fund (provided certain asset coverage tests are met). Further, applicants state that APS Shares are redeemable at each Fund's option.
3. Applicants state that prior to February 2008, dividend rates on the APS Shares for each dividend period were set at the market clearing rate determined through an auction process that brought together bidders, who sought to buy APS Shares, and holders of APS Shares, who sought to sell their APS Shares. Applicants explain that their by-laws provide that if an auction fails to clear (because of an imbalance of sell orders over bids), the dividend payment rate over the next dividend period is set at a specified maximum applicable rate (the “Maximum Rate”) determined by reference to a short-term market interest rate (such as LIBOR or a commercial paper rate). Applicants state that an unsuccessful auction is not a default; the relevant Applicant continues to pay dividends to all holders of APS Shares, but at the specified Maximum Rate rather than a market clearing rate.
4. Applicants state that if investors did not purchase all of the APS Shares tendered for sale at an auction, dealers historically would enter into the auction and purchase any excess shares to prevent the auction from failing. Applicants represent that this auction mechanism generally provided readily available liquidity to holders of APS Shares for almost twenty years. Applicants believe that many investors invested short-term cash balances in APS Shares believing they were safe short-term investments and, in many cases, the equivalent of cash.
5. Applicants state that in February 2008, the financial institutions that historically provided “back stop” liquidity to APS Share auctions stopped participating in them and the auctions began to fail. Applicants state that beginning on February 13, 2008, all closed-end funds advised by Eaton Vance that had outstanding APS Shares (including the Funds) experienced auction failures due to an imbalance between buy and sell orders. Applicants also state that there is no established secondary market that would provide holders of APS Shares with the liquidation preference of $25,000 per share. Applicants state that four of the five Funds to date have redeemed approximately two-thirds of their APS Shares with borrowings from a commercial paper conduit facility, but have been prohibited from redeeming their remaining APS Shares because, among other reasons, they would not have the 300% asset coverage required by section 18(a)(1) of the Act after a full redemption of the APS Shares. As a result, applicants state that there is currently no reliable mechanism for holders of APS Shares to obtain liquidity, and believe that, industry-wide, the current lack of liquidity is causing distress for a substantial number of APS shareholders and creating severe hardship for many investors.
6. Applicants seek relief for a period of two years to facilitate temporary borrowings by the Funds that would enhance their ability to provide a liquidity solution to the holders of their APS Shares in the near term  while they seek a more permanent form of replacement leverage. Because of the limited availability of debt financing in the current, severely constrained capital markets, the applicants believe that the negotiation, execution and closing of a borrowing transaction to replace the leverage currently represented by the APS Shares, if it can be effected, might take several months following the issuance of the Order. Once the debt incurred in replacement of the APS Shares is in place, it is uncertain whether and when the applicants will be able to issue LPP Shares to replace the debt, or how quickly the securities and capital markets will return to conditions that would enable the applicants to achieve compliance with the asset coverage requirements that would apply in the absence of the Order through some other means. In light of these factors, and given the continuing unsettled state of the securities and capital markets, which makes it impossible to establish a precise schedule for consummating capital markets transactions, the applicants believe that a two-year exemption period is reasonable and appropriate. Each Fund's refinancing of APS Shares would be subject to the Fund obtaining any necessary approval of changes to the Fund's fundamental investment policies and approval of the refinancing arrangements by the Fund's board of trustees (“Board”).
Applicants' Legal Analysis
1. Section 18(a)(1)(A) of the Act provides that it is unlawful for any registered closed-end investment company to issue any class of senior security representing indebtedness, or to sell such security of which it is the issuer, unless the class of senior security will have an asset coverage of at least 300% immediately after issuance or sale. Section 18(a)(2)(A) of the Act provides that it is unlawful for any registered closed-end investment company to issue any class of senior security that is a stock, or to sell any such security of which it is the issuer, unless the class of senior security will have an asset coverage of at least 200% immediately after such issuance or sale.
2. Section 18(a)(1)(B) prohibits a closed-end fund from declaring a dividend or other distribution on, or purchasing, its own capital stock unless its outstanding indebtedness will have an asset coverage of at least 300% immediately after deducting the amount of such dividend, distribution or Start Printed Page 58693purchase price. Section 18(a)(2)(B) prohibits a closed-end fund from declaring a dividend or other distribution on, or purchasing, its own common stock unless its outstanding preferred stock will have an asset coverage of at least 200% immediately after deducting the amount of such dividend, distribution or purchase price.
3. Section 6(c) of the Act provides, in relevant part, that the Commission, by order upon application, may conditionally or unconditionally exempt any person, security, or transaction from any provision of the Act if and to the extent necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act.
4. Applicants request that the Commission issue an Order under section 6(c) of the Act to exempt each Fund from the 300% asset coverage requirements set forth in sections 18(a)(1)(A) and (B) of the Act. Specifically, the Funds seek relief from the section 18 asset coverage requirements for senior securities representing indebtedness for a period not to exceed two years from the date on which the requested Order is issued (the “Exemption Period”) to permit the Funds to refinance any outstanding APS Shares issued prior to February 1, 2008 with debt so long as they have 200% asset coverage, rather than the 300% asset coverage that would ordinarily apply under section 18 to senior securities representing indebtedness, (a) when they incur that debt, and (b) when they declare dividends or any other distributions on, or purchase, their capital stock, after deduction of the amount of such dividend, distribution or purchase price. Applicants state that, except as permitted under the requested Order, if issued, the Funds would meet all of the asset coverage requirements of section 18(a) of the Act. In addition, applicants state that each Fund that borrows in reliance on the Order will either pay down or refinance the debt within the Exemption Period so that the Fund would, at the expiration of the Exemption Period and thereafter, comply with the applicable asset coverage requirements (200% for equity or 300% for debt) under section 18 of the Act.
5. Applicants state that section 18 reflects congressional concerns regarding preferential treatment for certain classes of shareholders, complex capital structures, and the use of excessive leverage. Applicants submit that another concern was that senior securities gave the misleading impression of safety from risk. Applicants believe that the request for temporary relief is necessary, appropriate and in the public interest and that such relief is consistent with the protection of investors and the purposes intended by the policy and provisions of section 18.
6. Applicants note that the illiquidity of APS Shares is a unique, exigent situation that is posing urgent, and in some cases devastating, hardships on APS shareholders. Applicants represent that the proposed replacement of the APS Shares with debt would provide liquidity for the Funds' APS shareholders while the Funds continue their efforts to obtain a more permanent form of financing (such as through the issuance of LPP Shares) that fully complies with the asset coverage requirements of section 18.
7. Applicants state that the requested Order would permit the Funds to continue to provide their common shareholders with the enhanced returns that leverage may provide. Applicants also represent that the Order would help avoid the potential harm to common shareholders that could result if the Funds were to deleverage their portfolios in the current difficult market environment  or that could result if a reduction in investment return reduced the market price of common shares.
8. Applicants believe that the interests of both classes of the Funds' current investors would be well served by the requested order—the APS shareholders because they would achieve the liquidity that the market currently cannot provide (as well as full recovery of the liquidation value of their shares) and the common shareholders because the cost of the new form of leverage would, over time, be lower than that of the total cost of the APS Shares based on their Maximum Rates and the adverse consequences of deleveraging would be avoided.
9. Applicants represent that the proposed borrowing would be obtained from banks, insurance companies or qualified institutional buyers (as defined in Rule 144(a)(1) under the Securities Act of 1933) who would be capable of assessing the risk associated with the transaction. Applicants also state that, to the extent the Act's asset coverage requirements were aimed at limiting leverage because of its potential to magnify losses as well as gains, they believe that the proposal would not unduly increase the speculative nature of the Funds' common shares because the relief is temporary and the Funds would be no more highly leveraged if they replace the existing APS Shares with borrowing. Applicants also state that the proposed liquidity solution would not make the Funds' capital structure more complex, opaque, or hard to understand or result in pyramiding or inequitable distribution of control.
10. Applicants state that the current state of the credit markets, which has affected the APS Shares, is an historic event of unusual severity, which requires a creative and flexible response on the part of both the public and private sectors. Applicants believe that these issues have created an urgent need for limited, quick, thoughtful and responsive solutions. Applicants believe that the request meets the standards for exemption under section 6(c) of the Act.
Applicants agree that any order granting the requested relief shall be subject to the following conditions:
1. Each Fund that borrows subject to 200% asset coverage under the order will do so only if such Fund's Board, including a majority of the trustees who are not “interested persons” (as defined in section 2(a)(19) of the Act) (“Independent Trustees”), shall have determined that such borrowing is in the best interests of such Fund, its common shareholders, and its APS shareholders. Each Fund shall make and preserve for a period of not less than six years from the date of such determination, the first two years in an Start Printed Page 58694easily accessible place, minutes specifically describing the deliberations by the Board and the information and documents supporting those deliberations, the factors considered by the Board in connection with such determination, and the basis of such determination.
2. Upon expiration of the Exemption Period, each Fund will have asset coverage of at least 300% for each class of senior security representing indebtedness.
3. The Board of any Fund that has borrowed in reliance on the order shall receive and review, no less frequently than quarterly during the Exemption Period, detailed progress reports prepared by management (or other parties selected by the Independent Trustees) regarding and assessing the efforts that the applicant has undertaken, and the progress that the applicant has made, towards achieving compliance with the appropriate asset coverage requirements under section 18 by the expiration of the Exemption Period. The Board, including a majority of the Independent Trustees, will make such adjustments as it deems necessary or appropriate to ensure that the applicant comes into compliance with section 18 of the Act within a reasonable period of time, not to exceed the expiration of the Exemption Period. Each Fund will make and preserve minutes describing these reports and the Board's review, including copies of such reports and all other information provided to or relied upon by the Board, for a period of not less than six years from the date of such determination, the first two years in an easily accessible place.Start Signature
By the Commission.
Florence E. Harmon,
1. Applicants note that the cost of the replacement leverage is expected, over time, to be lower than the total cost of APS Shares based on the Maximum Rates applicable to the APS Shares of those Funds.Back to Citation
2. Eaton Vance and its affiliates, including the Funds, have recently obtained no-action relief from the Commission staff in connection with Liquidity Protected Preferred Shares (“LPP Shares”), a new type of preferred stock that the Funds potentially would issue to supplement or replace the existing APS Shares. See Eaton Vance Management, SEC No-Action Letter (June 13, 2008).Back to Citation
3. Section 18(h) of the Act defines asset coverage of a senior security representing indebtedness of an issuer as the ratio which the value of the total assets of the issuer, less all liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of senior securities representing indebtedness of the issuer. The section defines asset coverage of the preferred stock of an issuer as the ratio which the value of the total assets of the issuer, less all liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of senior securities representing indebtedness of the issuer plus the amount the class of senior security would be entitled to on involuntary liquidation.Back to Citation
4. An exception is made for the declaration of a dividend on a class of preferred stock if the senior security representing indebtedness has an asset coverage of at least 200% at the time of declaration after deduction of the amount of such dividend. See section 18(a)(1)(B) of the Act.Back to Citation
5. See supra note 2.Back to Citation
6. Applicants state that the bulk of each Fund's portfolio is in floating rate senior secured loans. Applicants believe that it is difficult to sell such loans at par value in the current market because of market makers' own impaired capital positions. Applicants expect, however, that the loans generally will be repaid in full as they come due. Applicants thus believe it would be disadvantageous to sell the loans at less than par into the current market.Back to Citation
7. Applicants acknowledge that managing any portfolio that relies on borrowing for leverage entails the risk that, when the borrowing matures and must be repaid or refinanced, an economically attractive form of replacement leverage may not be available in the capital markets. For that reason, any portfolio that relies on borrowing for leverage is subject to the risk that it may have to deleverage, which could be disadvantageous to the portfolio's common shareholders. Applicants therefore state that they regard leveraging through borrowing as potentially a temporary, interim step, with the issuance of new preferred stock as a possible longer-term replacement source of portfolio leverage, such as LPP Shares.Back to Citation
[FR Doc. E8-23672 Filed 10-6-08; 8:45 am]
BILLING CODE 8011-01-P