Aberdeen Global Income Fund Inc. plans to buy back all its auction-rate debt, the first closed-end fund to take the step since the market seized up in mid-January.

The fund will redeem $30 million of auction-rate securities known as preferred shares, replacing them with loans from a major financial institution, the fund said today in a statement.
About half of all closed-end funds used the auction-rate market to finance additional investments in government and corporate bonds, a strategy aimed at boosting returns. Auctions began failing as investors fled all but the safest government debt, leaving preferred shareholders with about $60 billion in securities they couldn't sell.
The news may put pressure on other fund managers to buy back auction-rate debt. Many brokers marketed the securities as a short-term investment similar to a money-market fund.
“Its encouraging that Aberdeen has done the right thing,” said John Dwyer of Duxbury, Massachusetts, who has $650,000 stuck in auction-rate preferred shares. “It's a great model for how all the issuers should behave.” Dwyer doesn't hold shares in the Aberdeen fund.
The fund, which is managed by Aberdeen Asset Management Inc. of Aberdeen, Scotland, trades at a 12 percent discount to its $127 million in net assets. The stock has returned 9.1 percent annually in the past five years, compared with 12 percent by the Standard & Poor's 500 Index.
Managers including Chicago-based Nuveen Investments Inc. and Boston-based Eaton Vance Corp., have resisted buying back their preferred shares, saying it would hurt their common shareholders. The companies, the largest closed-end fund managers, have said they are in talks with major banks aimed at bringing new liquidity to the market. The companies didn't immediately return phone calls seeking comment.
While Aberdeen is the first fund to announce a redemption, it won't be followed by many others, said Cecilia Gondor of Thomas J. Herzfeld Advisors Inc. in Miami, which specializes in closed-end fund research.
In addition to being a small fund, she said Aberdeen Global had a maximum interest rate, which takes effect when an auction fails, considerably higher than most closed-end funds, giving Aberdeen more incentive to refinance.
Other fund managers have said their funds still a higher return from their investments than they pay in interest to preferred shareholders.
(Source: Bloomberg)