A Note on the Disposition of Auction-Rate Securities by Non-Financial Corporate Investors

Abstract

After two decades of rare failure, at least nominally, the auctions that set the interest rates on auction-rate securities failed en mass in February of 2008. Few ARS have recovered. Absent auctions, auction-rate securities have traveled the yield curve, converting from securities that effectively matured in a week or a month into medium-term securities discounted at higher rates. The magic that made many investors over several decades believe that ARS was a short-term investment, even though the supporting collateral was long term, is unlikely to regain its effectiveness. This note provides tabulations, over time, regarding the holdings of auction-rate securities by 642 non-financial public companies. Public companies have lowered their exposure to ARS by 64%, as the par value of ARS held by these companies has declined from $40.4 billion to $14.4 billion due to issuer calls and government-mandated redemptions by the bankers that distributed these securities and then served as auction dealer for a fee. The estimated fair value of ARS is currently discounted from par by an average of 10% to 57%, depending on the type of ARS. For some reason, ARS has been held disproportionately by technology companies.