In a continuing downslide, 521 auctions for auction-rate securities failed yesterday, amounting to a rate of 66 percent in the $330 billion market. From 1984 through 2006, only 13 auctions failed as brokers usually bought the bonds when demand was weak. Brokers like Goldman Sachs Group Inc. and Citigroup Inc. stopped bidding on the auctions last month based on concerns that insurers backing the bonds might be downgraded. The rate of failure has since reached 87 percent on Feb. 14 and has ranged from 61 percent to 69 percent, according to Bank of America Corp.
When auctions fail, bondholders are left holding the securities and interest rates reset at a level spelled out in official statements issued at the initial bond sale. Rates on Port Authority of New York and New Jersey bonds rose to 20 percent on Feb. 13, up from 4.3 percent a week earlier after an auction failed.
State and local governments use the market to raise capital and they alone account for roughly $166 billion of the outstanding auction-rate debt. States and lawmakers are trying to revive the market as their budgets are pinched by rising yields on debt and a slowing economy and real estate market slashes tax revenue. Some of the proposed plans of action include:
The California Statewide Communities Development Authority said yesterday it is considering raising $10 billion to finance buying back the bonds it sold for local governments and hospitals. The issuers would then pay fixed interest on the debt, which would be held by the authority, for a year.
The New York Dormitory Authority said on Feb. 26 it plans to disclose bidding details and open the process to more banks for about $1.3 billion of its auction bonds in the hopes of lowering interest rates.
New York Comptroller Thomas DiNapoli is considering buying auction bonds for the state's $154.4 billion pension fund.
Last month, issuers, including 14 hospitals in California and Massachusetts, asked the SEC to let them bid on their own securities to prevent failures and lower rates until they could refinance the debt. Bond lawyers are concerned the issuers will run afoul of securities laws by bidding at their own auctions. In February, Lehman Brothers Holdings Inc. forbade the University System of New Hampshire to bid on some of it’s $150 million in auction debt. A growing list of lawmakers this week is urging regulators to let borrowers bid on their own bonds. However, the SEC is skeptical about issuer bids and hesitant to change the terms of contracts between buyers and sellers.
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