New model can price these illiquid instruments despite failed auctions
Savvysoft, the award-winning derivatives analytics provider, has announced the development of a new model to price Auction Rate Securities (ARS). The market for Auction Rate Securities has been thrown into turmoil as a result of failed auctions which have caused much of the market to become highly illiquid. Holders of these bonds need to mark them to market, and Savvysoft’s new model allows them to do that.
Auction Rate Securities are long term bonds which pay a floating rate of interest that resets frequently based on an auction of buyers, as often as every week or every month. This causes them to behave like short term money market instruments, as long as there are auction bidders. When there are more sellers than buyers, however, the auction fails, and with the current credit crisis this is exactly what has happened, making bond holders unable to sell their bonds, and unable to mark them to market. Savvysoft’s new model allows the bonds to be priced in the absence of bids.
“We’ve been contacted by several owners of ARS bonds, because they know our reputation for being able to price the toughest instruments,” said Rich Tanenbaum, Savvysoft’s president. “So we developed a model to help them out, and we’re offering our clients the choice of either running the model themselves, or having us run the model as a pricing service for them.”
Savvysoft’s models have passed the muster of auditors, who have signed off on the model’s values for use in company financial statements. The ARS model is available immediately.