Auction Rate Securities (ARS) were viewed as “cash equivalents” from the inception of the ARS market in 1984 until February 2008. And like other cash-equivalent securities, they were marked at par.
This made sense when frequent auctions (often every seven days) provided almost-instant liquidity to their holders. But since February 2008, auctions have been failing, leaving investors stuck with highly illiquid paper – sometimes with no maturity date – with a yield that's unrealistic, given the illiquidity of the securities.
Unless, or until, this situation reverses itself, reporting entities holding such paper have no other options but to set a “fair value” for the securities, which requires marking them at a discount from par. But how deep should this discount be?
Pluris has in-depth expertise valuing complex securities with limited or uncertain liquidity horizons. Because of our relationship with SecondMarket and our LiquiStat™ database, we have extensive information on the prices – and discounts – that buyers and sellers of ARSs are willing to trade at.
For information about valuing Auction Rate Securities, please contact us. To access Espen Robak's presentation on valuing ARS click here.