Auction Rate Securities Redemption Analysis
In this Barron’s article, the author sets out one of the more complete analyses we have seen regarding the various types of frozen Auction Rate Securities, and their likelihood (or unlikelihood) of being redeemed or sold in the future. The various types of ARS reviewed in the article include Municipal Issuers, Taxable Closed-End Funds, Municipal Closed-End Funds, Student Loans, and Collateralized Debt Obligations (CDO).
According to the article, the bleakest outlook is seen for the ARS backed by Student Loan Funds and CDOs which comprise about one-third of the ARS market ($105 billion of the $333 billion market). Only about $1 billion of the $85 billion in student loan ARS have been refinanced to date due to high refinancing costs and little incentive to refinance the comparatively low rates these ARS are paying.
The Collateralized Debt Obligation ARS are an even thornier issue. The Barron’s article states that the $20 billion in these ARS won’t be redeemed and that some may have invested in subprime mortgage securities. The chart at the end of the article estimates the market price of these securities at 50 cents on the dollar.
Many brokerage firms marketed and sold ARS to investors as safe, liquid alternatives to money market funds. If you are stuck with frozen ARS and you would like a free consultation to discuss your legal options with an attorney, please contact Greco & Greco.
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