Monster, Earthlink, Palm Blow It Again, Buy Millions in Auction-Rate Securities

Henry Blodget | March 28, 2008 8:01 AM

stockcrashfiresale2.jpgHow do you compound the misery of having a crappy business and a collapsing stock price? Stick your company's precious rainy-day fund in "cash-like" auction-rate securities.

Auction-rate securities, for those who haven't been following the credit crunch, are muni bonds whose rates are frequently reset at auction. For a while, they did what they were designed to do--allowing towns and cities to borrow money at slightly lower rates and "cash" investors to earn slightly higher ones--and this led Wall Street to declare them safe. Alas, these days many auction-rate securities can't be sold for love or money, which has left firms like Monster, Earthlink, Palm, and Intuit stuck with mountains of unsaleable paper.

Monster's (MNST) in the worst shape, says the WSJ, with $357 million (about 60% of cash balance).

Intuit (INTU) has $328 million (about 20% of cash balance).

Palm (PALM) $75 million (about 15% of cash balance).

Earthlink (ELNK) $60 million (about 20% of cash balance).

Will these massive piles of "money" ever be saleable at their face value? Possibly. If the economy doesn't melt down completely, the auction-rate market should eventually un-freeze, and the companies should be able to unload them. But at the very least we're probably looking at write-downs.

More at the WSJ ($)

 

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10 Comments

stone said:
In most cases I do not believe the principal is at risk unless you bought paper from sub-par entities. In some cases the liquidity has dried up but when that happens the interest rates increase so you actually make more money.
Henry Blodget said:
I'd be surprised if folks got out that easy, but you're right--this is not a sub-prime situation yet. It's just a liquidity issue (i.e., there is none).
cintra said:
And don't forget that some of the auctions clear every day. It's a slow thaw, but it happens. Some of the corporate paper (not so much the muni) has been redeemed, perhaps out of corporate goodwill (not the acctg sense) or fear of lawsuits. Finally, companies in a real cash crunch can always try to use a secondary market to clear the paper below par, which will, as you say, lead to write-downs. But that's a last resort, and if a company can hold on, they might be just fine.
dwight said:
I have a hard time blaming the companies with 20% of holdings in these. I've never read anything before this happened saying these were risky. It would have taken more than average foresight.

Monster having 60% in one class of securities though is poor cash management.
Henry Blodget said:
Agreed re the small holders, though alarm bells should go off any time someone hears the words "cash like."

That MOVE detail is horrible. Ouch.
Alex said:
You make it sound like they risk losing a large portion of this cash. stone is right - in most cases they'll recover the principal. Worst case they lose a percent on the principal IF they need access to all the cash right away, which is unlikely. I think the problem is being sensationalized.
stone said:
I sold one bond last week for $100K. It took all of 15 minutes to get it sold.
Tom said:
There are three types of ARS here: muni, student loan backed and closed end fund related preferreds.

The munis are the most functional right now with a decent % of successful auctions and significant refinancing activity. We see a significant number of MARS being called every day. Alas, corporations are drawn to this paper only if their federal tax rates are above 30% which would make the tax-exempt status work.

More likely, corps own the fully taxable student-loan backed paper which is a different story. SLARS have fewer and more complicated refi-restructuring options. None of these auctions are succeeding and there is no secondary market (though we hear of vulture bids at 90 or below). While the collateral here is sound and many of these SLARS are senior tranches with parity ratios of 100-130%, they will take more time to work out.

The closed end fund related auctions (ARPS) are typically a retail product which drew individual investors.

I hope this helps understand the market.

Tom
Stacy said:
I think the write downs are coming just in time for tax season. I hear there is a new solution to the ARPS situation. A new security is being developed to allow money market funds to purchase the auction rate securities. When this happens everyone will get out at par. I hope people don't feed into the vultures. Take a loan out against your ARPS and wait for this new vehicle to come to market which I hear will be soon.

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