Auction Rate Losses Costing Public Companies Over $1.8 Billion
According to a recent article on Bloomberg.com, the collapse of the auction-rate securities (ARS) market has cost shareholders of about 150 public companies more than $1.8 billion in investment losses to date.
From Google to JPMorgan Chase, more than 300 companies are struggling to value auction-rate bonds after dealers, battered by subprime-related losses, abandoned the $330 billion market in February.
“We've seen a real acceleration in the number of companies announcing they hold them, and also a greater portion of them taking write downs,” said Barry Silbert, CEO of Restricted Stock Partners, which operates the largest secondary market trading system for the securities.
According to a survey by Treasury Strategies Inc., corporations owned $98 billion of the securities on Jan. 1. The market collapsed a month later when investors turned on the ARS market amid concerns about the creditworthiness of bond insurers backing the debt. As demand waned, dealers that supported the market for two decades suddenly stopped acting as “buyers of last resort.”
``This is an unprecedented situation,'' said Jeff Glenzer, a managing director at the Association for Financial Professionals, a 16,000-member trade group. “There's not been a default but there's a complete loss of liquidity.''
In January, Bristol-Myers Squibb booked unrealized pretax losses of $142 million on $811 million of ARS, (It also replaced its treasurer.) Teva Pharmaceutical, the world's biggest maker of generic drugs, said on May 6 that it was taking a $55 million charge for ARSs it holds, which totaled $334 million as of March 31. On May 9, United Parcel Service, the world's largest package-delivery company, wrote down the value of $383 million invested in auction-rate bonds by $33 million. Gerdau Ameristeel, a Tampa, Florida-based steelmaker, posted a $22.7 million first-quarter charge on $105 million of investments.
On May 12, Google reported that it lost $10.8 million on $259.6 million it had invested in ARSs. Google marked down debt by about 4 percent. While Google's auction-rate securities “are primarily student loans, which are substantially guaranteed by the U.S. government,” they “do not have a readily determinable value and are not liquid,” the California-based company said in SEC filings.
Google spokesman Andrew Pederson affirmed in an e-mail that the ARS securities it holds are of “very high credit quality [and they] represent a small percentage of [the company’s] overall portfolio.”
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