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Auction-Rate Debt Value Rose 14% From 2009 Trough, Pluris Says

By : Dunstan McNichol | March, 31 2010
  April 1 (Bloomberg) -- Auction-rate debt held by companies including Corning Inc. rose about 14 percent in value on average in the final nine months of 2009 as credit markets improved, according to almost 400 corporate filings surveyed by Pluris Valuation Advisors. The companies on average discounted the par value of the $18.5 billion in auction-rate securities on their books by 20 percent in the final three months of 2009, according to a Pluris survey of U.S. Securities and Exchange Commission filings of 396 companies.  A year ago, the average discount bottomed at 30 percent, a March 2009 Pluris survey showed. "Over time I would expect continued improvement in pricing," Espen Robak, president of the New York-based analytical firm, said in a phone interview today. "The 20 percent will come down, I would expect." Pluris is affiliated with an auction-rate securities clearinghouse, Secondmarket. Auction-rate securities were investments marketed as a near-cash alternative that could be cashed out at sales typically held every seven, 14 or 35 days. The $330 billion market froze in February 2008 when banks that sold the securities stopped serving as buyers of last resort at the regular auctions, causing the transactions to fail. Corporations and other investors have been forced to hold onto their stakes or sell them at reduced prices. Hawaii, the 42nd-largest state by population, will have to write off $255 million of its more-than-$1 billion investment in the securities, the state auditor, Marion M. Higa, said March 23. Economic Stabilization "The decrease in discounts during the latest three quarters is likely due to the improvement in the credit markets and relative stabilization of the economic environment," the Pluris report said. The government will release March payroll figures tomorrow, and the median of economists' forecasts in a Bloomberg survey is for an increase of 184,000, the biggest in three years. Corporate debt rallied the past four quarters, the longest streak since 2004, according to a Bank of America Merrill Lynch index. Corning, which has $1.1 billion in auction-rate securities through its Dow Corning partnership with Dow Chemical Co., is the largest holder of the debt among publicly traded companies, according to Pluris. Corning, the world's biggest maker of glass for flat-panel televisions, recorded a $20 million impairment in the value of its auction-rate holdings on Dec. 31, compared with a $114 million assessment a year earlier, according to the company's latest annual report for 2009. Kelli Hopp-Michlosky, a spokeswoman for the Corning, New York-based company, didn't immediately have a comment when reached by telephone. Slimmer Markdown Overall, corporations recorded about $3.4 billion of lost value on auction-rate holdings, compared with a markdown of $5.2 billion a year ago, Pluris said. The pool of auction-rate securities has shrunk to about half its February 2008 size in the past year, according to Pluris. Municipal borrowers have refinanced 82 percent of the auction-rate debt they issued and state and federal regulators won settlements requiring investment banks to repurchase at least $61 billion of the securities they sold. Merrill Lynch, now a unit of Bank of America Corp., and at least six other banks have won dismissal of investors' class- action lawsuits over auction-rate securities that claimed the banks misled buyers on the risks of the product.

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