Capital Markets

Frozen Liquid: More Auction-rate Securities Put on Ice

SBA Communications becomes the latest company stung by auction-rate securities when its inability to liquidate them forces it to take a $15.6 milli...
Tim ReasonFebruary 22, 2008

SBA Communications became the latest corporation to be stung by auction-rate securities (ARS) Thursday after a $15.6 million impairment charge related to the securities nearly doubled the company’s reported fourth-quarter loss.

SBA, which operates wireless communications towers, reported a net loss of $28.9 million, or $0.27 per share. Had it not been for the impairment related to auction-rate securities, the company’s net loss per share would have been $0.13.

Auction-rate securities have long been considered a safe and liquid investment, and many companies record them as cash equivalents on their balance sheets. But in recent months, investors have spurned auctions where the securities are sold, calling their liquidity and par value with the dollar into question. The failure of the auctions has hit companies including 3M and US Airways, and forced some, notably Bristol-Myers Squibb, into the unusual step of writing down cash.

In SBA’s case, the company’s short-term investments consisted of nine auction-rate securities worth $70.7 million. With auctions for the securities failing to produce buyers in the last few months of last year, SBA found itself unable to liquidate any of the securities before December 31, 2007, which is also the end of the company’s fourth quarter. After the end of the year, the company said, it was able to sell six of the securities, worth $40.9 million, at par value. But, it said, the fair value of the remaining securities can no longer be considered to be the same as their nominal par value of $29.8 million. Based on market conditions and credit quality, it took an other-than-temporary impairment charge of $15.6 million.

While the charge represented a big EPS hit, the charge appeared to do little actual damage to SBA. The company ended the quarter with $107.9 million in cash and cash equivalents, a figure that did not include the impaired auction-rate securities. SBA purchased some 175 communications towers for $134.8 million during the fourth quarter and spent $57.8 million building 20 new ones, as well as an additional $12 million for land, easements, and lease extensions. In its financial report, the company noted that since the end of the fourth quarter, it paid cash for 47 additional towers costing $19.1 million.

Likewise, two weeks after the end of the quarter, the company was able to secure a $285 million, three-year senior secured revolving credit facility, although use of the facility is restricted to the construction or acquisition of additional towers.

SBA’s most recent safe harbor statement included a note that its estimates of the fair value of remaining auction-rate securities could be further affected by market conditions.