More ARS writedowns still to come

Research by Pluris Valuation Advisors looked at the public filings of 629 ARS investors with combined holdings with a par value of $37.1 billion and found that only 445 of the investors surveyed had written down the value of the securities, with writedowns so far totalling $3.69 billion. The remaining 184, however, were still accounting for their paper at full value as of December 31, 2008.

Although researchers concluded that the data indicates "the full impact of the loss of liquidity from this market has not been fully realised by all the holders", they also noted that buyback provisions for retail customers announced by auction agent banks in recent months might have lulled institutional investors into a false sense of security.

Data from the 'Big Four' leading auditing firms showed that 74.7% of audited clients with ARS holdings had suffered writedowns, with an average markdown of 17%. The researchers concluded from the data that further writedowns will likely be recorded in coming quarters.

Among the ARS paper itself, the most widespread losses have been taken by holders of notes issued by student loan companies with 83% of investors suffering an average impairment of 9.39%. Sixty-one percent of municipal ARS holders have taken writedowns averaging 12.7% while 47% of auction-rate preferred shares (ARPS) investors suffered discounts averaging 12.6%.

The ARS market collapse began in February 2008 when broker-dealers that had acted as buyers of last resort for unbid securities decided to abandon their backstop role in the market due to concerns about their own liquidity, leading to hundreds of failed auctions.

As a result, issuers of variable-rate debt into the ARS market such as municipal authorities and student loan companies faced large penalty fees to compensate holders of the illiquid notes, with losses eventually spilling over to affect ARS investors as the market paralysis continued.

See also: Misery for municipals
Bank of America and RBC in ARS settlement
Banks' latest ARS settlement falls short
UBS commits to $18.6 billion ARS buyback

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