Press Release Summary: Among 395 Companies, Reaction Ranges From No Action To 98% Write Down
Press Release Body: NEW YORK, N.Y., June 12, 2008 - Corporate America has shown a staggering difference of opinion in reaction to the failure of auction-rate securities (ARSs), ranging from business-as-usual to discounting the value of ARSs by as much as 98%, a study of 395 ARS holders by Pluris Valuation Advisors LLC has found.
While 210 companies continue to account for their auction-rate securities at full par value, 185 have taken an impairment, recognizing that ARSs are no longer worth their full par value.
"The 'fair value' of an asset is whatever the market says it is worth," according to Pluris President Espen Robak. "When auctions are failing because of a lack of demand for an asset, the logical conclusion is that some discount from par value is in order. However, it is not unusual for companies to take some time to analyze the issue and its impact on values."
One reason for the difference in reaction may be the different types of ARSs, he said. Some ARSs remain relatively liquid and others are very illiquid.
He added that some issuers of ARSs may also be uncertain about what constitutes a reasonable discount for ARSs. While it is still in its infancy, Robak said the evolving secondary market can help determine ARSs' fair value, as required by FAS 157, the new valuation standards that took effect on Jan. 1, 2008.
Pluris specializes in valuing illiquid assets, such as auction-rate securities and restricted securities in public and private companies. Pluris has proprietary access to data produced from trades on the
Restricted Securities Trading Network (RSTN), its affiliate, which has emerged as the leading secondary market for illiquid securities. ARSs are used by municipalities, student-loan companies, closed-end funds and others to raise capital. Interest rates are set periodically at auctions held by investment banks. Whenever there was insufficient buying interest at auctions, banks in the past have stepped in to support the market by purchasing ARSs. However, because of other demands for capital, since mid-February banks have been allowing the auctions to fail. As a result, ARSs, which were previously considered to be a "cash equivalent," became illiquid.
The largest discounts were generally taken by the largest holders of ARSs. Of those taking an impairment, in 90 cases - nearly half of the 185 companies - ARSs accounted for more than half of their cash holdings.
Businesses took a total write down of $1.85 billion in the first quarter. Robak believes smaller companies will close the gap with larger companies by taking write downs this quarter.
The largest write down among companies studied was taken by Bristol Myers, which recognized $456 million in impairment charges - a 57% discount - based on valuation models taking into account expected cash flow streams and collateral values, including assessments of credit quality, default risk, discount rates and overall market liquidity. The largest discount as a fraction of par value, however, was taken by IncrediMail, Ltd., which wrote off 98% of their ARSs.
"Overall, the data indicates that at this early date, the full impact of the loss of liquidity from this market has not quite been realized by all of the holders," Robak said. "Some companies may be waiting to see if the auction market recovers and others may be waiting to see what actions other public companies will take. Whatever the reason, the market has not yet fully adjusted to auction failures."
A copy of the Pluris study, "Accounting Impact of the Auction Failures," is available by contacting Pluris Valuation Advisors at 212-248-4500 or at www.PlurisValuation.com. About Pluris Valuation Advisors Pluris Valuation Advisors LLC of New York, N.Y., is a full-service valuation firm specializing in the valuation of restricted securities of public companies, auction-rate securities, stock options and other assets that lack liquidity. Pluris valuations are used for financial reporting, tax purposes, business transactions and litigation support. Additional information is available at www.PlurisValuation.com. ##
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