Nuveen Investments Inc. is developing a debt instrument to allow the refinancing of billions of dollars in frozen auction-rate securities.

The Chicago-based firm said it has arranged for an initial commitment of up to $1.75 billion in liquidity support from a major financial institution to be used in a variable-rate demand, preferred debt instrument (VRDP).

The instruments could replace auction-based securities, which came into trouble several months ago when the credit market seized up and left Nuveen’s fund holders unable to get a good auction price.

“If we are successful in completing our efforts to develop VRDP, and market it to investors, we believe we can achieve our key goals of reducing costs of leverage over time for common shareholders of Nuveen municipal funds while providing liquidity at par for ARPS holders,” said Bill Adams, executive vice president, Nuveen Investments.

Other mutual fund operators including Eaton Vance Corp. and Calamos Asset Management, have been caught in the same situation after the failure of the auction system.

Nuveen’s VRDP could be available in 30 to 60 days, pending approval of the funds’ board of trustees.

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