Standard & Poor's Friday ceased pricing more than half of the auction-rate securities previously listed on its securities evaluation service due to lack of information, the company said.
"Information and clarity are the underlying fuels of pricing and in the absence of being able to get that kind of information we feel that it's prudent to stop pricing for those securities that we're not able to get that kind of information readily for," Standard & Poor's spokesman Michael Privitera said.
Standard & Poor's Securities Evaluations released a spreadsheet of 2,799 Cusips corresponding to affected securities on Friday morning. The firm had previously priced about 5,000 ARS, which included municipal securities and student loan securities.
Once a stable market that could count on broker-dealers picking up any slack in demand, the auction-rate security market has seen many auctions fail in the past three weeks. Standard & Poor's uses information from auction agents to price the ARS. Frank Ciccotto, senior vice president in charge of Standard & Poor's security evaluations, said they assumed that auctions on the list they put out had failed.
"If there's a failed auction and we do not see that there's a bid in the marketplace today, we're not pricing the security because in our minds there is no secondary market for that and there is no convention for how you price that in the market today," senior vice president in charge of Standard & Poor's security evaluations Frank Ciccotto said.
"The bonds that we are pricing, we are pricing based on the fact that we've gotten information about a successful auction, so the auction has run as normal and the auction went off at par," he added. "So based upon that successful auction we feel our number represents fair value or we've seen secondary market activity in the security at par."
Market sources said that auction-rate securities often trade at par. However, recent analysis provided to The Bond Buyer by the MuniCenter LLC, an online trading platform for fixed-income securities, including auction-rate securities, shows that in some cases auction rates are trading away from par due to continuing market dislocations.
"A search of trade data from the MSRB, from Feb. 21 through Feb. 28, confirms that there were a significant number of such trades; surprisingly, there were trades both below and above par," the analysis said. "Discounts were in some circumstances surprisingly large, as much as 5% in a few cases."
ARS represent a small portion of the three million securities Standard & Poor's prices. Privitera said that they would assist their clients to price the securities if they could provide information such as ongoing notification of successful auctions, verifiable trades the secondary markets, or certain trading information.
Interactive Data Corp., a competing pricing service, declined to comment.
Dick Larkin, senior vice president and director of research with Herbert J. Sims & Co., said that "there's been a lot of turmoil in the auction-rate market, and something like this is certainly not going to help."
"It's a pretty bad time out there, I guess," he said. "It's certainly another thing that people are going to have to deal with, and it's certainly not good for the auction-rate market, which has been under a lot of stress already."
McDonnell Investment Management LLC managing director and chief research officer Richard Ciccarone said it would be difficult to determine the fair market value of those securities.
"It's a very challenging problem for holders that are in a fiduciary position to properly price securities and among those it would seem that it begs guidance from regulators on how to handle that," he said. "If the pricing service can't find its price then how does anyone else do that very well?"
Matt Fabian, managing director at Municipal Market Advisors, said that the decision could impact retail investors.
"A lot of the retail shops use [Standard & Poor's Securities Evaluations] for their clients, and auction-rate securities are a retail security, so they're going to need to shift providers," he said.
The list of the Cusips on in the list Standard & Poor's Securities Evaluations released on Friday included the auction-rate securities of issuers such as the California Statewide Communities Development Authority, the Illinois Student Assistance Commission, the Kentucky Higher Education Student Loan Corp., the Louisiana Public Facilities Authority, the Massachusetts Health & Educational Facilities Authority, the Montana Higher Education Student Assistance Corp., the Dormitory Authority of the State of New York, the Pennsylvania Housing Finance Agency, the Puerto Rico Highway & Transportation Authority, and the Vermont Student Assistance Corp. and many others.
Dakin Campbell contributed to this story.