
[Federal Register: October 7, 2008 (Volume 73, Number 195)]
[Notices]               
[Page 58691-58694]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07oc08-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-28431; 812-13540]

 
Eaton Vance Floating-Rate Income Trust, et al.; Notice of 
Application

October 2, 2008.
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: 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.

Filing Dates: 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.

ADDRESSES: 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.

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).

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 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.

[[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 \1\ while they seek a more permanent form of replacement 
leverage.\2\ 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'').
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    \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.
    \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).
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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.\3\
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    \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.
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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

[[Page 58693]]

purchase price.\4\ 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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    \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.
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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 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.\5\
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    \5\ See supra note 2.
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    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 \6\ or that could result if a 
reduction in investment return reduced the market price of common 
shares.
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    \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.
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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 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.\7\ 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.
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    \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.
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    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' 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 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

[[Page 58694]]

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 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.

    By the Commission.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-23672 Filed 10-6-08; 8:45 am]

BILLING CODE 8011-01-P
