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Do ARS Pacts Make Treasurers Jittery?

Banks are promising to repay investors for illiquid auction-rate securities, but activity in the secondary market for the instruments is on the rise.
Marie Leone, CFO.com | US
August 15, 2008

The number of multibillion-dollar settlements agreed to by banks that allegedly duped investors into thinking auction-rate securities were as liquid as cash grew to six this week. JPMorgan Chase, Morgan Stanley, and Wachovia joined Citigroup, Merrill Lynch, and UBS, which previously agreed to try making ARS investors whole over the next year or two.

The agreements were forced upon the banks after investigations by the Securities and Exchange Commission and the New York State Attorney General's office revealed allegedly abusive sales tactics by the banks.

Yet companies that hold the securities don't seem comforted by the preliminary settlement agreements. Indeed, recent activity on the Restricted Securities Trading Network, an exchange that sells ARS in the secondary market, shows an uptick in the number of corporations that want to sell off their ARS at a discount.

In fact, CFO.com reported earlier this month that a review of data released by Pluris Valuation Advisors and RSTN showed that out of 460 auction-rate holders that made public filings by the end of last month, 281 have taken write-downs worth a total of $2.11 billion. Moreover, of 179 companies that have not yet filed their second-quarter reports, Pluris expects 100 to take impairments this month.

ARS are long-term bonds and preferred stocks that resemble short-term instruments because their interest rates are reset periodically — usually every 7, 28, 35, or 49 days. The rate is reset by a modified Dutch-auction process, and because investors are supposed to be able to buy and sell the securities so frequently, they have been generally regarded as equivalent to cash.

Barry Silbert, CEO of RSTN, speculates that companies may be cashing in now because in some cases, retail investors are scheduled to be repaid ahead of institutional investors. He also points out that some banks released press statements noting that they would be making their "best effort" to repay institutional investors (see list below). Such a statement, posits Silbert, may give corporate treasurers the jitters.

The list below contains the most recent information collected by RSTN, which updated its ARS settlement Web page to include Friday's Wachovia announcement. The data is collected from public statements released by the banks, the SEC, and the New York State AG's office; the settlement amounts are estimated based on the public documents.

Citigroup — Proposed settlement announced August 7, 2008
Client holdings: $19.3 billion
Individual investors: $7.3 billion
Institutional investors (best efforts): $12 billion
The settlement start date for individual investors is not listed; the end date is November 5, 2008. For institutional investors, the start date is not listed; the end date is December 31, 2009.
Qualifiers
• Individual investors refers to all natural persons, small institutions, and charities.
• Investors must have purchased before February 11, 2008.
Notes
• Institutional investors: best efforts attempt to liquidate securities by the end of 2009
• Will make whole any losses sustained by customers who purchased securities before February 11, 2008, and sold such securities after that date for a loss

JPMorgan Chase — Proposed settlement announced August 14, 2008
Client holdings: N/A
Individual investors: $3 billion
Institutional investors (best efforts): N/A
The settlement start date for individual investors is on or before November 12, 2008; the end date is November 12, 2008. For institutional investors, there is no start date listed; the end date is December 31, 2009.
Qualifiers
• Individual investors refers to individuals, charities, and small-to-midsize businesses with account values and household values of less than $10 million.
• ARS were purchased through J.P. Morgan Securities Inc., Chase Investment Services Corp., or Bear, Stearns & Co. prior to February 12, 2008.
Notes
• Institutional investors: best efforts attempt to liquidate securities by the end of 2009
• Does not cover specified employees of the firm (financial advisers, registered representatives and/or current or senior management)
• Will compensate individual investors who purchased ARS through the firm prior to February 12, 2008, and sold such securities at a loss prior to August 14, 2008

Merrill Lynch — Proposed buyback offer announced August 7, 2008
Client holdings: N/A
Individual investors: $12 billion
Institutional investors (best efforts): N/A
The start date for the buyback offer for individual investors is January 15, 2009, and the end date is January 15, 2010.
Qualifiers
• Individual investors refers to retail clients including individuals, charitable institutions, and many family-owned and small businesses.
• No purchase date or institutional information provided
Notes
• Individual investors currently hold an estimated $12 billion in auction-rate securities, which they expect to be reduced to under $10 billion by January 2009 as a result of announced and anticipated issuer redemptions.


Morgan Stanley — Proposed settlement announced August 11, 2008
Client holdings: N/A
Individual investors: $4.5 billion
Institutional investors (best efforts): N/A
The settlement start date for individual investors is on or before September 30, 2008; the end date is December 11, 2008. For institutional investors, there is no start date listed; the end date is December 31, 2009.
Qualifiers
• Individual investors includes all individuals, all charities, and those small-to-midsize businesses with accounts of $10 million or less.
• Investors must have purchased securities prior to February 13, 2008.
Notes
• Institutional investors: best efforts attempts to liquidate securities by the end of 2009.
• Institutional investors who purchased securities after February 13, 2008, as well as holders where the auctions are clearing, will be excluded from the program.
• Will also make whole any losses sustained by individual investors who purchased before February 12, 2008, and sold at a loss prior to August 11, 2008.

UBS — Proposed settlement announced August 8, 2008
Client holdings: $22.1 billion
Individual investors (less than $1 million): N/A
Individual investors (up to $10 million): N/A
Other (tax-exempt ARPS): $3.5 billion
Institutional investors (best efforts): $10.3 billion
The settlement start date for individual investors with less than $1 million is October 31, 2008; the end date is January 1, 2011. The start date for individual investors with up to $10 million is January 1, 2009; the end date is January 1, 2011. The start date for tax-exempt investors is not listed; the end date is October 31, 2008. The start date for institutional investors is June 30, 2010; the end date is not listed.
Qualifiers
• Individual investors (less than $1 million) include natural persons, small businesses, and charitable organizations with less than $1 million.
• Individual investors (up to $10 million) include all other UBS individual investors and charitable organizations as well as small business investors with account and household values up to $10 million.
Notes
• Will make whole by September 15, 2008, any losses sustained by the investors above who sold ARS after February 12, 2008.

Wachovia — Proposed settlement announced August 15, 2008
Client holdings: $8.8 billion
Individual investors: $5.7 billion
Institutional investors: $3.1 billion
The settlement start date for individual investors is on or before November 10, 2008; the end date is November 28, 2008. For institutional investors, the start date is on or before June 10, 2009; the end date is June 30, 2009.
Qualifiers
• Individual investors include individuals, charities, and religious organizations, as well as small and midsize businesses with account values and household values of less than $10 million.
• Institutional investors include all other investors.
• ARS were purchased through Wachovia Securities, Wachovia Capital Markets, and A.G. Edwards.
• Investors must have purchased securities prior to February 13, 2008.
Notes
• Will reimburse investors who would have been covered by the offer but who sold their ARS below par between February 13, 2008, and the date of entry of the settlement.
• ARS that are the subject of functioning auctions will not be eligible for purchase.




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