Most analysts thought that write-offs of auction-rate securities at public companies would cost shareholders. That turned out to be right. The paper was taken on board by companies that believed that it was a liquid as cash but paid slightly better interest rates. When the market in the instruments dried up due to the credit crisis, auction-rate securities could not be sold.
Auditors looked at the entire mess and told companies to decrease the value of the instruments which were on their balance sheets as "cash equivalents". Those hits went straight to the P&L.
Word was already out that some big firms like Google (GOOG) and Starbucks (SBUX) had been hit.
The Wall Street Journal writes that "According to a study of earnings reports conducted by securities-valuation firm Pleurisy Valuation Advisor's LC, 402 public companies disclosed that they held variations of auction-rate securities. Half had written down the value of their holdings. Of those that did, the average markdown was 13.2%, the study shows."
What is not obvious in the study is that some of these companies do not have cash and other securities on their balance sheets to make up for auction-rate problems. Those firms could face actual cash shortages. It is also not clear what the companies which have not written down their investments will do. Their auditors may have something to say about it.
AKAM shares are down $1.01, o4 3.4%, to $28.57; the stock is now down five days in a row, and has dropped $4.33, or more than 13%, since last Monday’s close at $32.87.
Citigroup’s John Reilly Walsh is out pounding the table on the stock today, repeating his Buy rating and advising investor to take advantage of the weakness. He offers four theories on what might be ailing the stock:
-Worries on ComScore data, suggesting online ad weakness and e-commerce slowing.
-Disclosure of auction-rate securities exposure. Akamai had $280 million in auction-rate paper at December 31; as of February 26, $145.5 million of that paper had experienced failed auctions, the company disclosed in its 10-K.
-A report last week from Jefferies & Co.’s Katherine Egbert noted that the company is burning through its net operating loss carryforwards and will be fully taxed by 2011.
-Concerns about health of Q1.
Walsh contends Akamai’s business remained strong, driven by e-commerce growth and the explosion in demand for online video. He says the stock under $30 in the past has proven to be good buying opportunity. He maintains his Q1 estimates of $188 million in revenue, with EPS of 39 cents. (Guidance was $186 million to $190 million and 38-39 cents.)
In its earnings release this morning, Best Buy (BBY) disclosed that it held $417 million of auction-rate securities at March 31, all of which has been reclassified as non-current given the failure of the auction-rate market due to insufficient buyers.
The company said most of the securities are AAA/Aaa-rated and collateralized by student loans guaranteed 95%-100% by the U.S. government. The company so far has not taken any impairment charges to the value of the securities.
Aside from its auction-rate holdings, the company has $1.4 billion in cash; that suggests the company had invested about 23% of its total cash in auction-rate paper. The company said it does not believe the issue will have a material impact on the company’s ability to execute on its business plans for 2009.
Auction Rate Securities: More Tech Holders Uncovered
Posted by Eric Savitz
The list of companies which hold some of their corporate cash in auction-rate securities continues to grow. In short, many companies have invested cash in what were supposed to be highly secure instruments; but the market for the paper has collapsed, depriving these companies of liquidity. Yesterday, I noted a list from Jefferies of Internet companies that have exposure to the growing problem; this morning, I noted that Monster.com’s (MNST) large slug of auction-rate paper could prevent it from buying back stock. I’ve previously reported on auction-rate securities holdings by Cypress Semi, HLTH and WebMD, Tekelec and ADC.
Adding more names to the list this morning is JMP Securities enterprise software analyst Patrick Walravens. He finds holdings in 4 of the 18 companies he covers:
Ariba (ARBA): $3.4 million exposure, or 6% of net cash.
Actuate (ACTU): $16.5 million exposure, 25% of net cash.
RightNow (RNOW): $18.3 million, 19% of net cash.
Omniture (OMTR): $21.5 million, 17% of net cash.
You can be sure there are many more; I’ll add to the list as they crop up.
Some Internet Companies Exposed To Auction-Rate Paper
Posted by Eric Savitz
Quite a few Internet companies have exposure to auction-rate securities, according to a survey of securities filings by Jefferies & Co.’s Youssef Squali.
Many companies have invested at least a portion of their cash holdings in auction-rate paper, seeking to generate some extra yield. But the breakdown of the auction-rate paper market has left many companies with positions that are illiquid. The terms of many auction-rate issues provided that interest rates actually move higher when the auction system fails - as it has recently - so these companies are actually generating some extra pennies on their money. But they also can’t get out of the positions right now. (Imagine if your bank increased your savings rate, but wouldn’t let you withdraw your original deposit.)
Squali notes that while the ARS exposure is not really a major concern for most Internet companies, a lengthy period of illiquidity could limit the ability of some to buyback shares and make acquisitions.
Here’s a list of companies Squali found to be holding auction rate paper:
-ComScore (CSRE): About $7 million in ARS exposure.
-Earthlink (ELNK): $60 million in exposure as of February 27.
-Google (GOOG): Held $49 million in ARS preferred securities at December 31.
-InnerWorkings (INWK): About one third of cash, which as of December 31 stood at $44.7 million.
-J2 Global (JCOM): $47.6 million at December 31.
-Omniture (OMTR): $21.5 million in auction-rate munis at February 22.
-Shutterfly (SFLY): $52.3 million at February 29.
-Valueclick (VCLK): $34.3 million at end of February.
-VistaPrint (VPRT): $16.9 million at June 30, 2007.
The credit crisis is in full swing through most of the U.S. economy, but it has barely touched venture-fueled Silicon Valley. Until recently, that is. Up to 20% of venture backed startups may have been convinced by their financial advisors to put much of their spare cash into something called Auction Rate Securities, on the promise of money market-like liquidity with better returns. Now, that money is frozen, and startups are scrambling to find a way to free up the cash.
Auction Rate Securities, a $330 billion market, are rolled over periodically (every 7, 28 or 35 days) to allow quick liquidity for investors. In their 20 year existence the markets have never stalled. Until February, that is, when concerns over the health of the municipal bond market froze these auctions. Since then, anyone holding the securities has been unable to get any liquidity, and the end of the freeze is nowhere in sight. Venture capitalist and blogger Paul Kedrosky has been talking about the issue regularly on CNBC.
Some big companies have been hit. Jet Blue, for example, had $611 million, or a 72% of its cash and investment securities, tied up in ARSs. But in an informal survey, twelve out of sixty venture backed startups had some amount of cash in these securities, too. Often without the knowledge of the venture capitalists who financed them. A venture capitalist says that he believes 5-10% of total invested cash is frozen.
Those VCs are now scrambling to help their portfolio companies find alternate sources of cash to meet payroll and other obligations. The first call is often to Silicon Valley Bank, said one venture capitalist who has a number of portfolio companies in “deep cash flow trouble.” Another said that brokers are loaning money back to the companies at about the same rate that the frozen securities are paying, giving them some liquidity.
Comerica has been mentioned in many of the calls I’ve had venture capitalists, who say that the bank advised their clients to invest in ARSs as safe alternatives to money market funds, with a higher rate of return. “We just had no idea this was even a risk at all,” said another VC.
Update: One startup that specializes in illiquid securities, Restricted Stock Partners, is trading ARSs on its electronic market. So that might be an option for some cash-strapped startups.
Update 2: A February 21 note from Silicon Valley Bank enumerates the carnage: “Auction Rate Securities of all forms are failing at a daily rate between 70 to 80 percent or between $15 to 25 billion.” Gulp.
Cypress Semi Reclassifies Some Auction Rate Securities As Long Term Due To Lack Of Liquidity
Posted by Eric Savitz
Cypress Semiconductor (CY) disclosed in its new 10-K filing that it has classified $67.8 million of auction-rate securities as long-term investments as of December 30 due to the failure of the auction rate securities market. Cypress is one of a number of tech companies that has gotten tripped up by investments in auction rate securities.
As of February 28, the company said, $44.9 million of its auction rate securities have failed auctions, “and we expect that the remaining auction rate securities will fail, due to sell orders exceeding buy orders.” Cypress said the problem is not credit quality, but rather “a lack of liquidity.”
So what happens if Cypress wanted to use the cash? They’ll have to wait. “In the event we need to access these funds associated with failed auctions, they are not expected to be accessible until one of the following occurs: a successful auction occurs, the issuer redeems the issue, a buyer is found outside of the auction process or the underlying securities have matured,” the company said.
As has been widely described in the world financial press, recent uncertainties in the credit markets have adversely affected the liquidity of auction rate securities as potential buyers have been unwilling to purchase these securities, many of which are guaranteed by insurers adversely affected by the existing conditions in the mortgage securities market. While the liquidity of these investments has been significantly impacted by these conditions, we continue to receive interest payments every 28 days. We are not able to predict whether conditions in the market for these securities will worsen or improve. As of December 31, 2007, we have a total of $20.3 million invested in asset backed auction rate securities and $12.4 million in cash and cash equivalents. As a result of the conditions summarized above, we have been unable to obtain third-party valuations for these securities in a cost-effective and timely manner. The complexity of the valuation is derived by the fact that this security is collateralized by 126 structured finance transactions. We plan to complete an independent valuation in the second quarter, prior to the publication of our audited financial statements. Such valuation may require a charge to earnings for Q4 2007 and 2007 to reflect a material impairment of our long-term investments. However, we believe we have sufficient cash resources to withstand the likely effects of the illiquidity of our auction rate securities on our operations.
On February 20, 2008, we filed a Statement of Claim with the Financial Industry Regulatory Authority and commenced an arbitration against the international bank and certain employees thereof that invested these funds on behalf of the Company. The claim alleges, among other things, that the bank was supposed to invest the funds in highly liquid, highly safe, 28-day auction-rate securities, but -- without the Company's authorization -- invested the funds in collateralized debt obligations (CDOs). In particular, the claim alleges that the bank invested the funds in a security called "Mantoloking CDO" without telling the Company that this was a CDO investment until after the purchase had already occurred. The claim also describes how, after the fact, the bank advised that the security, which has a stated maturity date in the year 2046, had been rolled "due to failed auction."
The Company's claim includes causes of action for fraud, violation of various NASD rules (including the NASD's suitability rule), violation of Section 10(b) of the U.S. Securities Exchange Act and SEC Rule 10b-5, negligent misrepresentation, breach of fiduciary duty, conversion, misappropriation and breach of contract.
Texas Instruments Cites Global Mkts For Failed Auctions >TXN
Last update: 2/26/2008 3:26:28 PM
DOW JONES NEWSWIRES
Texas Instruments Inc. (TXN) said Tuesday that liquidity issues in global credit markets led to the failure of the company's auctions of auction-rate securities this month.
The Dallas semiconductor company said in a filing with the Securities and Exchange Commission that it had invested $1.04 billion in auction-rate securities at the end of 2007 and had reduced its holdings of those securities to less than $575 million by the middle of February through a normal auction process.
Texas Instruments said that its subsequent auctions failed because the number of securities offered exceeded the number of bids.
Auction-rate securities are variable-rate debt securities that Texas Instruments sell at periodic auctions to provide liquidity.
The company said it believes the credit quality of these securities is still high because they are backed by pools of student loans guaranteed by the U.S. Department of Education.
Texas Instruments said it doesn't believe the failed auctions will have a material adverse impact on its ability to fund its operations.
It s just another example of how bankers and hedge funds screw up technology and economy
updated July 21.
neutral and undecided. Keeping cash and eventually missing some opportunities seems the smaller risk.
For the advanced (trading in days ranges): certain patterns hint at time compression and bullish advance. They do contradict tested and solid analysis methods. But their occurence is ..hm... somewhat surprising and therefore ...interesting.
Aventine Stock Hits New Lows After Co. Says Liquidity Problems Will Delay Plant Construction
NEW YORK (AP) -- Aventine Renewable Energy Holdings Inc.'s stock hit a new low Friday after the company said liquidity problems may delay its construction of new plants.
The ethanol producer's shares fell $1.56, or 18.4 percent, to $6.94, having traded as low as $6.79 earlier in the day. The stock's previous low was $7.76, reached on Nov. 21.
Aventine said Thursday it had $211.5 million invested in auction-rate securities as of Dec. 31. Aventine expected those securities to be liquid investments, which are ordinarily sold at auction every 28 days. However, due to problems in the credit markets, the company has been unable to find buyers for a
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The claim also describes how, after the fact, the bank advised that the security, which has a stated maturity date in the year 2046, had been rolled "due to failed auction."
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