108 Auction Rate Security Sales Fail Friday; 24 Succeed -Source

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NEW YORK -(Dow Jones)- More than 80% of the public auction-rate securities up for resale failed Friday as investors continue to give this market the cold shoulder.

Out of a total of 132 on offer, investment banks that underwrite the auctions were unable to sell 108 auction-rate securities, according to sales results provided by a person close to the process. Friday saw fewer auctions than on previous days this week, the document showed, compared with 201 on offer Thursday, and 276 and 268 on offer Tuesday and Wednesday, respectively.

Auction-rate securities are initially sold as long-term bonds but are effectively turned into short-term securities through auctions typically held every seven, 28 or 35 days. Issuers - for the largest part municipalities - reap the low financing costs associated with short-term debt, while investors gain liquidity through the frequent sales.

The market is an important source of financing for municipalities, while providing an attractive option for corporate treasurers and cash managers at investment funds to park cash for short periods of time. Banks normally ensure there is sufficient liquidity in the market by stepping in when auctions fail. But with their balance sheets already overladen with leveraged loans and other complex debt securities, banks are no longer willing to take on more securities. As a result, investors have been left holding the bag - and issuers have had to pay penalty rates....

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