April 2, 2008 / 11:56 PM / 11 years ago

Secondary bids value auction debt 5-25 pct below par

NEW YORK, April 2 (Reuters) - Investors stuck with auction-rate securities can sell them in the developing secondary market, but they are likely to recover only between 75 to 95 cents on the dollar.

That is the average range of bids for auction rate bonds offered for sale on an electronic trading platform managed by New York-based Restricted Stock Partners, the company’s CEO Barry Silbert told Reuters.

These secondary market bids provide some indication of write-downs facing cash-strapped dealers with auction rate securities on their books and of losses facing investors in need of cash.

The Restricted Securities Trading Network began trading auction rate securities in early March after the $330 billion market succumbed to a global credit crunch and investors could not sell securities once considered almost as safe as cash.

Silbert said currently over 150 different securities are listed for sale on the trading platform and he expects activity to pick up once investors realize that they may not be able to recover the full face value of their securities in the future.

UBS AG UBSN.VX on Friday began lowering the values of auction-rate securities held by its clients. For details click on [ID:nN29294690].

“The UBS news was a bit of a reality check for a lot of holders,” Silbert said.

“Up until then, major brokerage firms were not demonstrating to the customers that there was any risk to the principal. By marking it down, it telegraphed to customers that the secondary market may be an attractive way to free up some liquidity albeit at a discount.”

Individual investors and corporate treasurers have used the Restricted Securities Trading Network to sell bonds, while buyers included hedge funds, sovereign funds, issuers and high-yield bond funds. Blocks of bonds for sale range from $25,000 to $40 million, Silbert said, but declined to provide trading volume.


Bids for auction rate bonds sold by U.S. municipalities have the smallest discounts, but student loan paper could get bids as cheap as 75 cents on the dollar and closed-end fund preferred securities could get bids of around 80 to 90 cents on the dollar, according to Silbert.

Discounts on student loan bonds are the highest because they pay below market penalty rates when auctions fail — that is, when not enough buyers emerge to clear all bonds put up for sale.

The write-downs for UBS clients were about 5 percent, while some were less than that, and in a few limited cases, they were more than 15 percent, a source familiar with the policy said.

Auctions began to fail en masse in February when dealers, already reeling from billions of dollars of mortgage related write-downs and fearing more losses from troubled bond insurers, stopped supporting the market.

Silbert said between 60 percent and 80 percent of auctions continue to fail.

Todd Ault, CEO of Zealous Trading Group, the owner of theZealousATS electronic platform, said bids were as low 60 cents on the dollar on some securities listed on its platform, but few transactions took place as investors decided to ride out the crisis in hope that issuers will buy back securities.

Although many municipalities and closed-end funds, such as Nuveen Investments, Eaton Vance Corp. (EV.N) and BlackRock Inc (BLK.N), have begun redeeming their auction rate securities, Silbert said the secondary market will not be short-lived.

“In a normal credit environment, it would still take a year or more to refinance $330 billion of securities and in the type of credit environment we are in, it’s just not feasible for that level of new issuance to take place,” he said.

Moreover, unlike states and cities that had high penalty rates, other issuers actually have below market penalty rates and have no incentive to redeem their auction rate paper, he added.

The Financial Industry Regulatory Authority on Monday urged investors to hold on to auction rate securities if they do not have an urgent need for cash. The regulator cautioned against selling the bonds in the secondary market or taking margin loans. For details, see [nN31413549]. (Reporting by Anastasija Johnson; Editing by Jan Paschal)

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