Corporate & Securities Law

Financial Week has reported that money funds are dumping variable-rate notes that banks must honor.  The latest securities acronym to hit a snag are VRDNs.  The $380 billion market for variable rate demand notes has seen them dumped en masse over the past few weeks by money market mutual funds that invest in them, reported Peter Crane, founder of money fund researcher Crane Data. 

VRDNs are similar to auction-rate securities in that they are a form of long-term debt tied to short-term interest rates commonly issued by municipalities, but unlike auction-rate securities they have a put option, so banks are required to give investors their money back.  That last feature makes them an acceptable investment for money market mutual funds.  "That's why you've seen a whipsaw in yields [in money-market funds]," Mr. Crane said. "Two weeks ago they fell through the floor," he said, "because of all of the VRDNs that had been put back to the banks.  Money funds got their money back and had nowhere to reinvest it," he noted.  Mr. Crane said that his index of tax-exempt money fund yields fell to a low of 1.5% on February 20th before recovering to 2.43% last week. 

But money funds and corporate investors interested in exiting VRDNs may find some run-around from broker-dealers.  Reuters reported last week that some banks were making it harder for clients to sell VRDNs by sending them to tender agents before cashing out.  SNSFE is investigating these recent developments and welcomes any comments or information.