A small a number of ARS auctions were successfully completed today but most are still failing, according to a person familiar with the matter. All of the major financial institutions have decided to stop “stabilizing” the auctions by taking the securities onto their own books, and there is little sign that this policy decision will halt. Citigroup stopped supporting the auctions on Friday. UBS later this week. Many others had already called an end to their auction support policies.
But there is some life in the market for ARS. Hedge funds are starting to buy some of the securities—when the failure has triggered a high interest rate or when they can get them at a discount. Many investors—both individuals and corporations—continue to have large amounts of capital essentially locked up in the ARS.
The market for ARS was about $260 billion, funds that are now illiquid. This massive illiquidity is having ripple effects across various asset classes and financial institutions. If the failures continue, many hedge funds may see redemption requests as investors scramble to get cash. Investors facing capital calls from private equity funds may also need to need to get creative to find liquid resources. Brokers tell DealBreaker that their clients are angered because many of them were lead to believe that the ARS was as good as cash.
Posted by guest, Feb 15, 2008 2:54PM
ARS were effectively as good as cash for a long time, and the sudden illiquidity hits at exactly the wrong moment...just before tax time when many were using the ARC cash to pay off taxes.
Some banks offer a way out by allowing investors to borrow against assets held at the bank. If the auction fails, then the issue reverts to its max clearing rate, which could be very high (I've seen some running at 15%). Since the rate kicks in immediately, the investor can borrow what they need at prime (6%) or less (LIBOR), and pay off the interest at the max rate while the issue restructures. Inconvenient, but it frees up the money.