Spurred by guidance the Securities and Exchange Commission issued Friday to help quell the turmoil in the auction-rate securities market, at least two municipal issuers rushed to disclose their intention to bid on their own auction-rate bonds to escape high interest costs.
But the issuers, which had planned to participate in the auctions of their securities yesterday and today, have now postponed their plans for several days.
The reason for the delays, transaction participants and other market sources said, is that the broker-dealers and lawyers are being cautious in the steps needed to make sure they are in full compliance with the SEC's guidance, which outlined the conditions under which issuers and borrowers could bid on their bonds without triggering commission enforcement action.
"The SEC guidance provides a lot of things that have to be done," said one lawyer. "I think that everybody is realizing that what the SEC says will work is going to take some work to accomplish. "
Besides suggesting that issuers or borrowers publicly disclose their intent to bid on their bonds at least two business days before doing so, the SEC also said they should disclose detailed information about the bidding that occurred in the most recent prior auction - information that probably would have to come from the auction agent.
"The broker-dealers are really afraid of getting on the wrong side of the SEC, and with valid reason," said Matt Fabian, managing director at Municipal Market Advisors.
"It's a sign of a new environment that we've been talking about here at MMA, in this sort of new world where the broker-dealers are going to be trying to better insulate themselves from municipal-related risks, so they're trying to push more costs and risks back onto their issuers," Fabian said. "I think broker-dealers are less willing to take risks and that's going to be the reality going forward."
In a notice sent to the nationally recognized repositories Monday, the St. Petersburg, Fla., Health Facilities Authority disclosed that All Children's Hospital Inc. today would bid on some health facilities revenue auction-rate bonds that were issued by the authority in 2007. All Children's Hospital is the borrower of the bond proceeds.
But Arnold T. Stenberg Jr., senior vice president and chief financial officer of All Children's Hospital, said while the hospital's bond counsel, Bryant Miller Olive PC, worked all weekend to prepare required information, the issuer had to forego the bid.
"Despite our ability to comply entirely with the SEC guidance, we're finding that the broker-dealer firms on both the sale side and the buy side are having a very difficult time getting comfortable with the transaction," Stenberg said.
Stenberg said he is frustrated by the delay, but that some transaction participants, particularly Citi, the broker-dealer, feel they need more time to make sure they are complying with every condition the SEC set forth for confirming that such actions will not trigger commission enforcement actions.
"I think in fairness to the different investment banking firms, they have to comprehend any possible scenario. This is uncharted territory," Stenberg said.
Grace Dunlap, a partner at Bryant Miller and bond counsel for All Children's Hospital, said, "I think it's a little bit of everybody trying to digest it and have safety in numbers. But then you know you have the borrowers out there just bleeding."
"The SEC letter was helpful but everybody is very cautious about trying to make sure the holders are protected," Dunlap said.
In a material event notice sent to the repositories on Sunday, the Missouri Health and Educational Facilities Authority disclosed that four borrowers planned to bid on auction-rate bonds to be auctioned yesterday and today. The borrowers include Stowers Institute for Medical Research, Stowers Institute for Resource Development Inc., Stowers Medical Institute Inc., and Stowers Resource Management Inc.
Rod L. Sturgeon, executive vice president and chief financial officer of Stowers Institute for Medical Research and Stowers Institute for Resource Development, indicated yesterday that it would take a few days to work out the transactions. He declined to provide details, but confirmed the borrowers did not bid on their bonds yesterday.
"We're hoping to settle things in the next few days," he said.