Corporate & Securities Law

Recently, the Financial Times discussed an interesting aspect of the auction-rate securities debacle.  In an article entitled, "Auction-Rate Securities 'Implied Support', Joanna Chung discussed what investors thought they were buying.

She stated:

The vast majority of investors in some of the "safest" bonds hit by the credit squeeze were led to believe they would be bailed out in case of trouble, according to research to be published Monday. 

More than 85 per cent of companies that invested in the collapsed market for auction-rate securities thought Wall Street banks would provide support during crises, research shows.

The findings could lead to further strains between banks and their customers over the now-defunct market, one of the biggest casualties of the credit squeeze and the subject of numerous regulatory probes.

The $330bn auction-rate securities market was routinely used by companies looking to park cash in liquid, highly-rated securities that offered slightly higher yields.  While the securities are long-term debt, interest rates are periodically set at auctions, and so appealed to investors seeking short-term debt. 

"Organisations based their confidence in the liquidity of [the] instruments on the belief that dealers would support the markets regardless of market conditions," according to a survey by the Association for Financial Professionals.

Nearly 70 per cent of corporate treasurers whose organisations held auction-rate securities said dealer support was implied, while 17 per cent said they were "told explicitly that the investment bank would ensure that the auctions would not fail."

Many top companies "believed, incorrectly, that dealers would support the auctions if bidders failed to materialise", aid the survey, which is based on 342 respondents, of which about 30 per cent invested in auction-rate securities at some point in the past four years.

The collapse of the market started in February as banks withdrew support from the sector and has left investors holding illiquid securities with long-term maturity profiles.

In one of the first regulatory actions to stem from the probes, the Massachusetts state securities regulator last week filed civil fraud charges against UBS for allegedly misleading investors about the securities, allegations that the Swiss bank denies.

SNSFE continues to investigate and counsel both individual and corporate clients who bought auction-rate securities.

Source:  Financial Times