In the News: Recent Developments

February 27, 2008

DASNY Eyes Investors For Its ARS

More Broker-Dealers May Shore Up Bonds

By Ted PhillipsThe Dormitory Authority of the State of New York hopes bringing more broker-dealers into auctions of $1.3 billion bonds it issued as auction-rate securities on behalf of nonprofits will shore up the market for those bonds, at least in the near term, DASNY said in an investor conference call yesterday. The move comes as a private company has announced it will create an online secondary market for auction-rate securities. DASNY also began disclosing on its Web site yesterday detailed information about those auction rate securities, including broker-dealer information and the most recent interest rate reset, and plans to begin posting daily auction results.

The authority has 11 nonprofit clients – medical and higher education institutions – with auction-rate debt. All of those clients have had auctions fail in the past two weeks, though some have subsequently cleared. The disclosure does not include auction-rate securities backed by the state.

DASNY executive director David Brown4th, said that greater transparency was part of a strategy to attract more investors. “We’re trying to get more investors to look at the credit quality of these Dormitory Authority bonds,” Brown said. “They have very attractive yields relative to comparable bonds that you would see outside of the auction market so we’re trying to get the auctions themselves to work better.”

DASNY will ask borrowers to authorize more broker-dealers to bid on auctions. Currently the agency’s auctions each use a single broker-dealer.

“Auctions with multiple broker-dealers have better results,” said Joseph Fichera, chief executive officer of Saber Partners LLC, which is a financial adviser to DASNY. Any broker-dealer in the country will be eligible to participate in the auctions in the hope that more broker-dealers will increase competition and broaden distribution to more potential investors, he said.

Enlarging the pool of broker-dealers may not have the impact DASNY is hoping for because the market is in the process of shifting from buyers looking for liquidity to buyers looking to pick up some extra yield, said Evan Rourke, portfolio manager at MD Sass.

The buyers of auction-rate securities had been investors “willing to sacrifice yield for cash equivalence and once they didn’t have cash equivalence anymore it didn’t matter that the rate was [for example] 12%,” he said. “They didn’t want to own them. So you had to bring in a whole new pool of buyers.”

While bringing in more broker-dealers with different sales forces and customer bases might help it won’t significantly improve the situation for DASNY, Rourke said.

“They may feel they need to access a different customer base because we’re shifting from one group of buyers to another, you can see the logic to that action, I’m just not sure that’s going to make a difference,” he said.

Brown blasted the investment banks for pitching auction-rate securities and then letting the auctions fail.

“This has not been the investment banks’ finest hour,” Brown said. “In retrospect it’s clear it only worked because it was being supported by the capital of the investment banks and then without any warning and simultaneously these brokers stopped participating in the market which led to suddenly sharply higher interest rates for borrowers.”

Brokers are now in a position to reap rewards from borrowers who got socked with high interest rates and would now have to pay another investment banking fee if the borrowers decide to restructure or refinancing their debt.

“We are looking at the performance of these investment banks in their role as brokers very carefully, and we are going to keep it in mind going forward as we allocate future investment banking business,” Brown said.

The authority is also working with borrowers to convert or refund bonds that are in auction-rate mode, but Brown said that it was not clear whether or not all its clients would seek to get out of auction rates completely.

In the absence of market liquidity, a private company, Restricted Stock Partners of New York, saw an opportunity and is launching an online secondary market for auction-rate securities on March 3 by adding ARS to those already traded on its electronic market, Restricted Securities Trading Network. RSP is a division of Green Drake Capital Corp.

“Our marketplace I presume is going to used predominantly for holders looking to sell at a discount,” the company’s chief executive officer Barry E. Silbert said. “We are an independent centralized secondary market so we’re agnostic to the issuer, to the underwriter, to the banker, so it’s one place to go to see what’s available for sale as opposed to developing independent relationships with various banks across the street.”

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