Are there any experienced fixed income professionals who have an opinion regarding the failed Muni ARS auctions? Plyon, do you have experience in this market? Are the fears of the end to this product overblown? What are consequences if the *&$% really hits the fan? Obviously investors will simply hold until maturity or the bonds will be called, but any additional insight would be of interest. Thanks
As far as failed muni ARS, the biggest problem has been people owning these that cannot get their cash back due to failed auctions. Important to remember that they are not losing money, just locked up at much higher rates. Now that other investors are seeing the rates these ARS set at once the auctions fails, new investors are coming in allowing some these investors to get out (depending on the underlying credit). Most of these issuers are going to take their ARS out with long-term fixed or variable, but that takes time to do (several months).
Thanks Eddie. Liquidity is certainly the concern. My question stems from a quote from an analyst at Muni Market Adv’s. He said something to the degree that this is the beginning of the end of this product. The product has had problems in the past (bid rigging and accounting changes for corp b/s) and it appears a reputable firm such as MMA is questioning the viability of the ARS. It seems the statement is panic driven, but I simply don’t know… There is also talk of class action lawsuits (I would imagine against the brokers) related to misrepresentation of the product. In any case, thanks for the input Eddie.
I just had to redo my model a model b.c the company now has to reclassify there ARS as long term (take out of cash & equiv). From my standpoint, as long as this mess gets straightened out before companies need the cash back for working capital needs,…then its actually positive in a since that they are getting better yields due to failures. The implications for Closed end funds that use these as a source of financing is huge. This is going to increase the cost of leverage. Disclosure: Im on the equity side. I dont think the guys in FI are sharing my sentiment.