Companies Still Struggling to Make Peace with Auction-Rate Securities

The credit crisis may be starting to see bottom but many companies in the U.S. are still struggling to pick up after the auction-rate securities' mess that began in February.

More than 400 companies, including major players like Google, Bed Bath & Beyond and Starbucks, had at least $30 billion worth of auction-rate securities in their portfolios. They thought these were cash-like investments and now they're scrambling to get cash out of the frozen auction-rate market.

The chief financial officers of these companies are also learning another hard lesson; these securities are an accounting problem for businesses not used to pricing complicated securities. While half of those 400 companies have written down the value of their auction-rate holdings on an average of 13.2%, the other half still hasn't even though market prices have fallen significantly.

Some companies may not have acted yet because they may hold securities that have high quality government-guaranteed student loans as collateral. Or, those companies do not need access to their cash immediately.Still, the frozen auction-rate market hampers a company's financial flexibility and when they do need the cash, they'll have to sell the securities at a substantial discount. So far, about 25% of the $330 billion auction-rate market has been bought back by municipalities or refinanced with a different type of debt. The rest probably aren't worth their paper value and will have to sell at a discount ranging from 2% for municipal debt to 30% for student-loan-backed bonds.

Here are some examples of companies who have sold their auction-rate securities at a discount:

· Extra Space Storage Inc. in Salt Lake City sold its securities at the end of February at a 10.6% discount to their face value
· ImClone Systems Inc., a biotech pharmaceutical company, had a $69 million impairment charge in the first quarter resulting from the 43% it marked down on its auction-rate securities
· Bed Bath & Beyond took a temporary 2.2% markdown on $327 million of the securities
· Google had a 4.2% markdown on $260 million of the securities
· Jet Blue Airways had a 3.4% impairment charge on $324 million of the auction-rate debt
· Starbucks took no impairment on $70.5 million of such debt