 |
||||||
| Tuesday, February 9, 2010 |
Contact Us
|
 RSS
|
|||||
|
|
| |
|||
|
||||||
|
||||||
|
|
ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
|
|
|
|
February 18, 2008 12:01 AM ET
Auction-rate securities continued to crater last week, after banks failed en masse to back auctions and news of lawsuits further rocked the market. That’s left many more companies stuck with illiquid securities—an estimated one-third of U.S. corporations invest in auction-rate securities—with only a hope that the underlying bonds will be called, as more industry watchers forecast the death of the auction-rate market. Last Tuesday, the interest rate on some Port Authority of New York and New Jersey debt soared to 20% from 4.2% when its auctions failed. Things got even bloodier on Thursday: a stunning 87% of all auctions in the $330 billion market failed that day, according to a report by Banc of America Securities credit analyst Jeffrey Rosenberg. Also that day, reports surfaced that Merrill Lynch and UBS were going to stop buying auction-rate securities that had failed to attract enough bidders. UBS and Merrill Lynch declined to comment. “There’s a lot of panic,” said Joseph Fichera, CEO of Saber Partners, a financial advisory firm. “It seems suspicious that the brokers all at once seemed to change policy [and let auctions fail]. That may have spooked the market.” Sources said auctions sponsored by all the major broker-dealers (UBS, Merrill, Citigroup, Goldman, RBC Dain Rauscher, Lehman Brothers, J.P. Morgan and Morgan Stanley) had failed as of last week. The banks either declined to comment or did not respond to requests for comment. In addition, all four types of auction-rate securities, including those backed by municipal bonds, preferred stock, student loans and collateralized debt obligations, had experienced failed auctions. Some theorize that overly nervous corporations may be partly responsible for the auction failures. “To some extent, U.S. corporations have themselves to blame, for having panicked and headed for the exits,” said Mark Conner, principal at Corporate Treasury Investment Consulting. “That’s what ultimately caused auctions to fail, because the dealers did not have a responsibility to stop them [from failing].” Regardless, trouble in the auction-rate market is problematic for corporate America, which used to treat the securities as a cash equivalent. And because corporations have typically been the largest buyers of auction-rate securities, their desire to step away from the market may sound its death knell. “Corporations have a fairly long memory—when you get blindsided, you have very negative impressions of a particular investment type,” said Mr. Conner. Auction-rate securities are a form of long-term paper—either municipal bonds, preferred stock, student loans or collateralized debt obligations—whose interest rates are reset every seven to 49 days through an auction process. Auctions fail if there aren’t enough interested bidders. In the past, brokers would use their own funds to keep auctions from failing. But given their exposure to other subprime-tainted securities related to the credit crunch, many banks can no longer afford to provide such support, industry sources say. Disruptions in the market started last summer, when auction-rate securities linked to CDOs began to fail. Such securities represented an estimated 2% to 6% of the entire auction-rate market. The failures have caused pain for those that had invested in auction-rate securities in a bid to get a little more yield out of their excess cash. Bristol-Myers Squibb recently took a $275 million charge on its portfolio of auction-rate investments, which were of the CDO variety. US Airways and 3M have also reported problems with failed auctions. The carnage has not been limited to corporations. New details surfaced last week of a $1.4 billion complaint that a wealthy New Jersey family filed in January against Lehman Brothers, claiming they had lost access to $286 million because of illiquidity. Still, some banks continue to assuage investors holding auction-rate securities. Merrill Lynch strategist Kevin J. Conery said in a report last week that the recent spate of failed auctions “does not mean that all auctions are likely to fail as many issues are broadly held and do not require the capital commitment of a broker-dealer.” Mr. Fichera said all auction-rate participants would benefit from greater clarity: “The issue now is for issuers and brokers to bring forward information about how broadly held some issues are, so that people can judge the liquidity risk.” For now, the only hope for corporations with failed auction-rate securities on their books is that the bonds get called. That’s possible for holders of auction-rate paper tied to less risky collateral, including municipal bonds, preferred stock and student loans. Some banks will start to issue call notices in the near future, Mr. Conner predicted. Holders of auction-rate securities tied to CDOs may be out of luck. “I don’t foresee where some of those issuers can come up with the full amount of money to pay investors off,” he said. “They’re screwed.” FW
|
|
|
|
Latest News
• Reversal? Stanford advisers sue the SEC
March 5, 10:52 AM EST
• Third of companies not complying with new tax reporting rule
March 4, 4:25 PM EST
• Regulators aware of problems at First National for six years: audit
March 4, 3:31 PM EST
• Influential advisory group to look at fair-value, off-balance sheet accounting
March 4, 4:16 PM EST
• In a first, NY State hopes to sell bankrupt insurer
March 4, 3:59 PM EST
CRAIN'S BENEFITS OUTLOOK 2009
SPECIAL REPORT
MOST POPULAR
|
MORE ANALYSIS
Crain Financial Group:
InvestmentNews |
Pensions & Investments |
Workforce Management
Copyright ©2010 Crain Communications Inc
All rights reserved.
Privacy Policy |
Terms & Conditions