In the News: Recent Developments


Treating auction-rate securities as cash equivalents is looking like a no-no now. Treasurers looking for ways to boost the return on their short-term cash can no longer count on auction-rate securities. Last month PricewaterhouseCoopers LLP put out a memo stating that such securities should be listed on the balance sheet as investments, rather than cash equivalents. And according to PwC’s memo, the other Big Four accounting firms agree with that position.

Auction-rate securities, issued by both taxable and tax-exempt entities, carry final maturities of 20 to 30 years, but their rates are reset at auctions held at regular intervals ranging from every week to every six months. In recent years, with short-term rates at their lowest levels in decades, some treasurers have tried to eke out a slightly higher yield on their cash by investing in auction-rate securities. The PwC memo says that even though the frequent auctions allow the securities’ rates to reflect changes in interest rates and the issuer’s credit quality, “the legal maturity of auction rate securities is 20 to 30 years and, as such, the securities ordinarily should not be classified as cash equivalents, but rather as investments.”

In the wake of the PwC memo, corporations are lightening up on their positions of auction-rate securities. Zak Green, senior vice president of institutional sales at The Reserve Funds, says that based on what he’s seeing from Fortune 100 clients, “they just want to divest themselves of [auction-rate securities] entirely. They’re looking to shift into rated money funds. “Cash managers should be “mindful not to divest themselves of auction-rate securities and then go reaching for yield with something else that may not be a great fit from a safety and liquidity standpoint,” warns Green.

If many companies try to sell their auction-rate securities, will it cause prices to plunge or even result in a failed auction? “I don’t think the market collapses, I think yields go up,” says Joseph Fichera, CEO of Saber Partners LLC, a New York-based financial advisory firm that works with corporations and municipal entities. Lance Pan, head of credit research at Capital Advisors Group Inc. in Newton, Mass., who began to caution companies last year against investing short-term cash in auction-rate securities, says that while he doesn’t know of a failed auction, the reclassification has brought “a higher level of alert in the marketplace.” And while the PwC report describes the market for auction-rate securities as “highly liquid,” Pan says that “we’re not sure the market will be as liquid or as stable as it was before the reclassification.”

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