Capital Markets

Company Auction Rate Purge Builds Steam

Writedowns are growing as firms increasingly face the frozen market.
Alan RappeportAugust 6, 2008

Writedowns for holders of auction-rate securities are coming home to roost as companies unable to unload the frozen assets are beginning to report their losses.

This is the conclusion from new data from Pluris Valuation Advisors, along with the Restricted Securities Trading Network, a secondary market for auction-rates. Together, the two are working to take data from transactions on the network’s electronic market and calculate the current “fair value” of the securities. According to a review of 460 auction-rate holders that made public filings by the end of last month, 281 have taken writedowns 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.

Auction-rate securities 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. The $330 billion market has been largely frozen since February as a result of the credit crisis.

Just a few months ago only 40 percent of corporate filings revealed auction-rate writedowns but 80 percent of the 72 filings made in June and July took auction-rate losses, according to Pluris.

“Public companies and their auditors are constantly reevaluating the fair value of their ARS positions,” said Espen Robak, president of Pluris.

The report notes an “unambiguous trend” away from companies valuing their auction-rate securities at par as the year has progressed. What is more, it appears that auditors are playing a big role in encouraging auction-rate writedowns. Looking at filings from June and July, 84 percent of those with writedowns were audited by Big Four firms, while 36 percent were audited by non-Big Four firms.

“A natural assumption is that the Big 4 auditors, because of their research capabilities and also their expertise in securitization, are taking the more sophisticated approach to the valuation problem,” Robak told

Pluris has found wide variation in the discounts being taken in auction-rate writedowns. Discounts have ranged anywhere from zero to 98 percent, a reflection of the variety of auction-rate security types, and how difficult their valuation remains. Student loan auction-rates, for example, have been among the most severely impaired, often trading as low as 60 cents on the dollar.

“While many corporations have taken writedowns, the size is not always reflective of the discounts that would be taken in a sale under current market conditions,” Robak said.

4 Powerful Communication Strategies for Your Next Board Meeting