[Federal Register Volume 74, Number 14 (Friday, January 23, 2009)]
[Notices]
[Pages 4268-4271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1299]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-28603; 812-13552]


Calamos Convertible Opportunities and Income Fund, et al.; Notice 
of Application

January 14, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: 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.

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Applicants: Calamos Convertible Opportunities and Income Fund 
(``CHI''), Calamos Convertible and High Income Fund (``CHY''), Calamos 
Strategic Total Return Fund (``CSQ''), and Calamos Global Dynamic 
Income Fund (``CHW'') (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 period from the date of the Order until October 31, 2010. The Order 
would permit each Fund to issue or incur debt subject to asset coverage 
of 200% that would be used to refinance all of the Fund's auction rate 
preferred shares (``ARPS'') issued prior to February 1, 2008 that are 
outstanding at the time of the Order. 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 such debt 
has asset coverage of at least 200% after deducting the amount of such 
transaction.

Filing Dates: The application was filed on July 24, 2008, and amended 
on October 14, 2008, December 18, 2008, January 12, and January 14, 
2009.

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 February 9, 2009, 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.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090. Applicants: c/o James J. Boyne, Calamos 
Advisors LLC, 2020 Calamos Court, Naperville, IL 60563.

FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel, 
at (202) 551-6812, or Janet M. Grossnickle, Assistant Director, at 
(202) 551-6821 (Division of Investment Management, Office of Investment 
Company Regulation).

SUPPLEMENTARY 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).

Applicants' Representations

    1. Each of the Funds is organized as a Delaware statutory trust and 
is registered under the Act as a diversified, closed-end management 
investment company. Each Fund is advised by Calamos Advisors LLC 
(``Calamos'') and has issued and outstanding a class of common shares 
and several series of ARPS.
    2. Applicants state that the Funds issued their outstanding ARPS 
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 related to investments made with proceeds from 
leverage) that exceeds the leverage costs, which have been the amount 
of dividends that the Funds paid to holders of the ARPS. Applicants 
represent that ARPS 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 ARPS have a similar priority over dividends declared and 
payable on the Fund's common shares. In addition, applicants state that 
ARPS are ``perpetual'' securities and are not subject to mandatory 
redemption by a Fund so long as certain asset coverage tests are met. 
Further, applicants state that ARPS are redeemable at each Fund's 
option.
    3. Applicants state that prior to February 2008, dividend rates on 
the ARPS for each dividend period were set at the market clearing rate 
determined through an auction process that brought together bidders, 
who sought to buy ARPS, and holders of ARPS, who sought to sell their 
ARPS. Applicants explain that if an auction failed to clear (because of 
an imbalance of sell orders over bids), the dividend payment rate over 
the next dividend period was set at a specified maximum applicable rate 
(the ``Maximum Rate'') determined by reference to a short-term market 
interest rate (either the LIBOR or ``AA'' commercial paper rate for an 
equivalent period). Applicants state that an unsuccessful auction is 
not a default; the relevant Fund continues to pay dividends to all 
holders of ARPS, but at the specified Maximum Rate rather than a market 
clearing rate. Prior to February 2008, the Maximum Rate had never

[[Page 4269]]

been triggered due to failed auctions for any of the Funds.
    4. Applicants state that if investors did not purchase all of the 
ARPS tendered for sale at an auction prior to the failure of the 
auction market, dealers historically would enter into the auction and 
purchase any excess shares to prevent the auction from failing. 
Applicants represent that this auction mechanism had generally provided 
readily available liquidity to holders of ARPS for more than twenty 
years. Applicants believe that many investors invested short-term cash 
balances in ARPS 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 ARPS 
auctions stopped participating in them and the auctions began to fail. 
Applicants state that, beginning in February 2008, the Funds 
experienced auction failures due to an imbalance between buy and sell 
orders. Applicants believe that there is no established secondary 
market that would provide holders of ARPS with the liquidation 
preference of $25,000 per share. Applicants state that each of the 
Funds to date has secured debt financing enabling it to refinance (and 
accordingly redeem) a significant portion of its outstanding ARPS.\1\ 
Applicants state that CSQ, CHI and CHY's financing arrangements provide 
a commitment level that, if completely drawn upon, would allow them to 
retire all (or almost all) of their ARPS. However, Applicants represent 
that these Funds have been prohibited from utilizing these facilities 
in their entirety to redeem their remaining ARPS because they would not 
have the 300% asset coverage required by section 18(a)(1)(A) of the Act 
after a full redemption of the ARPS. Similarly, Applicants state that 
CHW has obtained the authorization of its board of trustees (``Board'') 
to issue a further $50 million in extendible notes and believes there 
is a market for them, but is unable to issue additional notes in order 
to redeem its remaining outstanding ARPS because it would not have 300% 
asset coverage immediately following the issuance of those notes. As a 
result, applicants state that there is currently no reliable mechanism 
for holders of their ARPS to obtain liquidity, and believe that, 
industry-wide, the current lack of liquidity is causing distress for a 
substantial number of ARPS shareholders and creating severe hardship 
for many investors.
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    \1\ CSQ obtained a 180 day rolling margin loan that enabled it 
to redeem 81.5% of its ARPS. CHI and CHY redeemed 72.9% and 81.4% of 
their ARPS, respectively, with the proceeds of a renewable 
commercial paper conduit facility with a maturity of 364 days. CHW 
issued extendible notes in a Rule 144A offering with a term of 364 
days and used the proceeds of such notes to redeem 85.7% of its 
ARPS.
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    6. Applicants seek relief for a period from the date of any Order 
until October 31, 2010 (``Exemption Period'') to facilitate temporary 
borrowings by the Funds that would enhance their ability to provide a 
liquidity solution to the holders of their ARPS in the near term \2\ 
while they either pay down or seek a more permanent form of replacement 
leverage, such as a new type of preferred stock that provides liquidity 
at liquidation value.\3\ Applicants submit that the gradual reduction 
of leverage through the use of proceeds of any common share issuances 
or the development of an alternative form of preferred stock might take 
several months, if at all, after the Order has been issued. Applicants 
state that it is uncertain when, or if, the securities and capital 
markets will return to conditions that would enable the Funds to 
achieve compliance with the asset coverage requirements that would 
apply in the absence of the Order. Given the uncertainty and the 
current and continuing unsettled state of the securities and capital 
markets, applicants believe that the Exemption Period is reasonable and 
appropriate. Each Fund's refinancing of its ARPS would be subject to 
the approval of the refinancing arrangements by the Fund's Board.
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    \2\ Each Applicant believes that refinancing would be 
appropriate and, over the longer term would provide additional 
investment income net of borrowing costs, and thus would be 
beneficial to its common shareholders.
    \3\ See, e.g., Eaton Vance Management, SEC No-Action Letter 
(June 13, 2008) (permitting the issuance of ``liquidity protected 
preferred shares'' to supplement or replace Eaton Vance funds' 
auction rate preferred stock).
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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.\4\
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    \4\ 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.
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    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 purchase price.\5\ 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.
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    \5\ 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. Further, section 18(g) of the Act 
provides, among other things, that ``senior security,'' for purposes 
of section 18(a)(1)(B), does not include any promissory note or 
other evidence of indebtedness issued in consideration of any loan, 
extension or renewal thereof, made by a bank or other person and 
privately arranged, and not intended to be publicly distributed.
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    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 the Exemption Period to permit the Funds to refinance any ARPS 
issued prior to

[[Page 4270]]

February 1, 2008 that are outstanding at the time of the Order with 
debt subject to the 200% asset coverage requirement for stock, 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 within the 
Exemption Period each Fund that borrows in reliance on the Order will 
either pay down or refinance the debt so that the Fund would, then 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 
the Act.
    6. Applicants note that the illiquidity of ARPS is a unique, 
exigent situation that is posing urgent, and in some cases devastating, 
hardships on ARPS shareholders. Applicants represent that the proposed 
replacement of the ARPS with debt would provide liquidity for the 
Funds' ARPS shareholders while the Funds continue their efforts to 
obtain a more permanent form of financing (such as through the issuance 
of preferred equity-based instruments) that fully complies with the 
asset coverage requirements of section 18.\6\
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    \6\ See supra note 4.
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    7. Applicants 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 \7\ or that could result if a reduction in investment 
return reduced the market price of common shares. Applicants also state 
that the requested Order would permit the Funds to continue to provide 
their common shareholders with the enhanced returns that leverage may 
provide.
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    \7\ Applicants state that a significant portion of each Fund's 
portfolio is in convertible securities. Applicants believe that it 
is difficult to sell such securities in the current market without 
artificially depressing market prices because the liquidity of that 
market has been reduced due to deleveraging by hedge funds and as a 
result of market makers' own impaired capital positions. Applicants 
believe, however, that convertible securities generally remain sound 
even though they are presently trading below their intrinsic value. 
Applicants thus believe it would be disadvantageous to sell these 
securities in the current market.
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    8. Applicants believe that the interests of both classes of the 
Funds' current investors would be well served by the requested order--
the ARPS 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 adverse consequences of forced deleveraging would be avoided and 
each Fund's investment return would be enhanced to the extent that the 
cost of the new form of leverage is lower than the investment return on 
the capital raised through the borrowings.
    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 ARPS with 
borrowing.\8\ Applicants also state that the proposed liquidity 
solution actually would simplify the Funds' capital structures, not 
make them more complex, opaque, or hard to understand or result in 
pyramiding or inequitable distribution of control.
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    \8\ 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 
forcibly 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 equity-based 
instruments as a possible longer-term replacement source of 
portfolio leverage.
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    10. Applicants state that the current state of the credit markets, 
which has affected the ARPS, 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' Conditions

    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 ARPS 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 easily 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 Fund has undertaken, and the progress 
that the Fund 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

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less than six years from the date of such determination, the first two 
years in an easily accessible place.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-1299 Filed 1-22-09; 8:45 am]
BILLING CODE 8011-01-P