U.S. auction-rate paper values all over map
By Joan Gralla
NEW YORK, April 2 (Reuters) - U.S. municipal auction rate securities, once touted as the next best thing to cash, are now valued all over the map, with some investment bankers even unwilling to give estimates in a market chilled by credit worries.
How much these long-term, floating-rate issues are worth depends on your own banker, as the approaches used range from valuing them at par to relying on third-party estimates.
Many wealthy individuals and corporations -- the major holders of these bonds -- are stuck as they try to sell them in time to pay income taxes.
Some bank clients have been told the value of certain securities is "N/A," or not available, which can appear startling online, as the computer shows them worth zero, according to investment banking sources who requested anonymity.
In the developing secondary market, these bonds only fetch 75 cents to 95 cents on the dollar, according to Barry Silbert, chief executive officer of New York-based Restricted Stock Partners, which runs an electronic trading service.
Merrill Lynch in a statement said: "For our March client statements we will again rely on third-party pricing services to estimate the value of our clients' ARS (auction rate securities)."
"We make clear to our clients in a disclosure statement that given ongoing market illiquidity, actual trades cannot be completed at these estimated values," it added.
A Merrill spokesman was not immediately available to elaborate on the estimates.
The $200 billion muni auction market began freezing in late January, when investors lost confidence in bond insurers that guarantee this paper.
The $330 billion auction rate market started locking up last summer, when the global credit crunch first hit, and some auction rate preferred shares, especially ones sold by closed end funds, have proved the most difficult to resell.
UBS AG (UBSN.VX) led the way on Friday, when it cut the value of the average auction rate security by 5 percent, though in some limited cases the markdown was a much as 15 percent.
"We are working with clients, on a case-by-case basis, to address their immediate liquidity needs, offering such solutions as margin loans and lines of credit at preferred lending rates," UBS said.
In contrast, Morgan Stanley (MS.N) said it was valuing the securities at par in the March statements. "But these statements include a special notice that basically says that because of market conditions the prices shown for an auction rate security may not reflect the prices that would be realized upon a sale," a spokeswoman said.
Both Lehman Brothers LEH.N and Citigroup (C.N) are still keeping muni auction rate securities at par, sources familiar with the banks' policies said.
"Why put clients through it when you don't know the value?" one of the sources said, explaining the reason for the policy.
Spokesmen for Lehman and Citi declined to comment. Goldman Sachs (GS.N) and JPMorgan Chase (JPM.N) had no information immediately available.
Several banks echoed UBS, which said it was working with other market participants to craft a solution. Industry groups also are taking part in this effort, they added.
A number of banks said that like UBS they were helping cash-strapped clients. But they did not specify what sorts of short-term loans might be offered or whether they would, for example, charge lower than usual rates on margin loans.
(Additional reporting by Anastasija Johnson)
