Pluris Valuation Advisors publishes a survey for holders of Auction Rate Securities (ARS) every six months.
This ARS Holders Survey is based on data collected from filings in the public record as of June 30, 2010. This survey primarily includes 10Qs filed by calendar year companies, and, for the ma jority of the holders in this survey, the data includes their holdings for the first half of 2010 and the accounting treatment of these holdings. Given the special circumstances of underwriters and brokers of ARS, firms within the financial sector continue to be excluded from our survey.
In total, Pluris found 348 holders of ARS, with the holdings having a total par value of $12.85 bil lion. The survey found that 299 firms had adjusted down the value of these investments, while 49 firms still account for their ARS holdings at par value. The aggregate impairment amount for the 299 firms with impaired holdings totals $2.6 billion, and includes both temporary and other-than-temporary impairments.
On June 30, 2010, UBS commenced offering to buy back Auction Rate Securities from their clients. It is our opinion that the majority of firms that liquidated their ARS during the first half of 2010 put those securities back to UBS.
The observed impairments to par value holdings vary significantly. Discounts ranged from 70% to 99% for companies making the most aggressive adjustments. On the other hand, approxi mately 14% of the companies surveyed did not take any discounts at all. Holders of Auction Rate Preferred securities (“ARPs”) were found to be, to some degree, more likely to discount their holdings than holders of other types of Auction Rate Securities.
The data indicates that illiquidity in the Auction Rate Securities market continues to impact the majority of the firms holding these securities that were once characterized as short term and cash-like. Although most firms realized the impact of these failures back in 2008 and early 2009, a small percentage of companies are continuing to mark their holdings at par. This practice is surprising, as companies have had time to recognize the connection between liquidity and security value. While many investors might have once thought of impairment as something that only results from deterioration in credit quality – an increase in default risk – there is no reason to not associate a reduction in liquidity with a drop in value now. Overvaluation is an increas ingly common error among firms that choose to either use internal calculations or ignore actual market data.
Although we saw a wave of redemption activity in the early parts of 2010, fears of sovereign de faults in Europe and the serving of demand letters to issuers of Auction Rate Preferred securities cooled redemption activity in the latter part of the first half of 2010.
Over the last few years, there has been a rash of litigation and arbitration cases brought against broker-dealers by corporate holders of Auction Rate Securities. While most large litigation and arbitration cases surrounding ARS have either been dismissed or results found in favor of the banks, several cases have brought victory to holders of Auction Rates. Namely, Intevac won an arbitration case against Citigroup, and other holders have won arbitration against UBS, Northern Trust and E-Trade, to name a few.
We will continue to monitor these activities and update our survey with results as they become available.
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