Capital Markets

Study: Many Companies Fail to Write Down ARS Losses (Corrected Version)

Among some who do take auction-rate-securities writedowns, the impairment charges are way too low.
David KatzFebruary 20, 2009

(Editor’s Note: This is a substantially cut version of a story first published on on February 18. We felt the cuts were necessary after a check of some of the data of the report against company filings showed that the report contains numerous factual errors. We thus recommend that readers should read the survey’s overall findings with skepticism. We regret the reporting lapse.)

In spite of the continuing shutdown of the market for auction rate securities, nearly 30 percent of public companies that hold them are reporting them at full par value, a study of financial statements through January 31 shows.

That means that 186 out of the 625 corporate ARS holders located by researchers at Pluris Valuation Advisors and Villanova University are still producing financials based on the disproved assumption that the securities are “as good as cash.”

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The takeaway from the study? “There’s still an awful lot of companies out there that are not properly accounting for [ARS],” Pluris president Espen Robak told The securities are long-term bonds and preferred stocks that resemble short-term instruments in that their interest rates are reset periodically via auctions. But little resetting – or buying – of ARS is actually going on these days.

Among the 439 companies taking ARS write-downs, the total impairment was $3.72 billion. The amounts being written down at individual companies, however, are “extremely varied, ranging from a few percent to 98 percent,” according to the study’s authors. “While many factors could account for the wide range, it may also indicate a lack of consistency in the way ARS are being written down.”

In searches of the Edgar database yielding data mostly from 10-Q and 10-K filings through January 31, Pluris found that the 625 ARS holders that the firm located had a total par value of their ARS holdings of $37.1 billion.

To be sure, the number of companies taking ARS write-downs has steadily risen since the market began seizing up in February 2008. Early in that year, as companies filed financials for the year ended December 31, 2007 few impairments were taken, according to the study report (see graph). (An exception was Bristol-Myers Squibb, which in the fourth quarter of 2007 took an impairment charge of $275 million on investments in ARS, particularly ones consisting of subprime mortgages.)

As early as February 2008, however, Citigroup was reporting that about $6 billion of mostly municipal debt auctions involving ARS failed on one day alone. From June 2008 through January 2009, the portion of ARS holders taking writedowns exceeded 70 percent, according to the Pluris study.