Pluris ARS Holders Survey

Each quarter Pluris Valuation Advisors publishes a survey for holders of Auction Rate Securities (ARS). This ARS Holders Survey is based on data collected from filings in the public record as of December 31, 2009. This survey primarily includes 10Ks filed by calendar year companies, and, for the majority of the holders in this survey, the data includes their holdings as of year end 2009 and the accounting treatment of these holdings. Given the special circumstances of underwriters and brokers of ARS, firms within the financial sector continue to be excluded from our survey.

In total, Pluris found 396 holders of ARS, with the holdings having a total par value of $18.5 billion. The survey found that 369 firms had adjusted down the value of these investments, while 27 firms still account for their ARS holdings at par value. The aggregate impairment amount for the 369 firms with impaired holdings totals $3.4 billion, and includes both temporary and other-than-temporary impairments.

The observed impairments to par value holdings vary significantly. Discounts ranged from 70% to 99% for companies making the most aggressive adjustments. Alternatively, approximately 7% of the companies surveyed did not take any discounts at all. Holders of Student Loan Auction Rate Securities were found to be more likely to discount their holdings than holders of other types of Auction Rate Securities.

The data indicates that illiquidity in the Auction Rate Securities market has impacted the majority of the firms holding these short term investments that were once characterized as cash-like. Although most firms realized the impact of these failures back in 2008 and early 2009, a small percentage of companies are continuing to analyze the landscape of the market and the subsequent impact on valuation. This delayed effect can often be attributed to the disconnect between liquidity and security value for many investors. Many investors might think of impairment as something that only results from deterioration in credit quality – an increase in default risk – and would not intuitively associate a reduction in liquidity with a drop in value.

Furthermore, infrequent instances of redemptions and refinancing may give investors a false sense of security. However, we continue to be surprised by firms that have failed to recognize that these securities are not worth face value. Overvaluation is an increasingly common error among firms that choose to either use internal calculations or ignore actual market data. Over the last few months, there have been a rash of litigation and arbitration cases brought against brokerdealers by corporate holders of Auction Rate Securities. We will continue to monitor these activities and update our survey with results as they become available.