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Mike Boswell
TriPoint Capital Advisors, LLC

More companies are taking writedowns on their holdings of auction rate securities, an investment that was viewed as a cash equivalent until the market became a casualty of the credit crunch in February.

The latest survey of ARS holders by Pluris Valuation Advisors shows that by the end of June, 435 companies had disclosed how much ARS they held and how they were accounting for it.

According to Pluris, 247 companies, or 57 per cent have taken writedowns. The total impairment for these companies was $2.132bn, up from $1.85bn at the end of May.

Espen Robak, president of Pluris, said: “The fraction of ARS holders taking writedowns is significantly higher than it was as of our last update in May.”

Back then, Pluris found that 185 companies had taken a write-down on their holdings, while 210 continued to hold their ARS at par value. The survey is compiled from searches of public filings made by companies.

Mr Robak added: “Reality has begun to take hold among chief financial officers. I would expect this to get pretty close to 100 per cent as we begin to see more second quarter disclosures.”

Among sectors, entertainment companies have the highest average discount at 30 per cent, followed by basic materials with 10.6 per cent. The remaining 10 sectors all have an average discount of less than 10 per cent, said Pluris.

The $330bn ARS market was routinely used by companies looking to park their cash in liquid, highly-rated securities that offered slightly higher yields. Municipalities, closed end mutual funds and student loan providers used ARS to fund long term liabilities.

Since the market for ARS began in 1984, the securities were generally treated like cash and marked at par on company balance sheets. Earlier this year, however auctions for these securities started failing as banks withdrew their support for regular sales. That has left holders with illiquid paper, which supports very long term liabilities for municipal borrowers.

Under the terms of a typical ARS, a holder could sell their holding whenever an auction was held, usually every seven, 28 or 35 days. Once banks stopped buying unsold securities at auctions in February, holders were unable to exit the market, but did receive higher penalty rates of interest.

Such yields, argue Pluris, are “unrealistic, given the illiquidity of the securities.” Last month, Aventine Renewable Energy, an Illinois-based operator of ethanol plants, sold $127.2m of student loan ARS for $97m.

Hedge funds and other buyers of distressed assets are looking at buying the securities but are also seeking a large discount, which is not helping resolve the market’s lack of liquidity.

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