March 14 (Bloomberg) -- By Jeremy R. Cooke
Billionaires Bill Gross and Wilbur Ross and the U.S. Securities and Exchange Commission failed to restore confidence in the $330 billion auction-rate bond market, as borrowing costs for states and municipalities rose.
Auctions for borrowers from San Francisco to Houston were unsuccessful even after Gross, who runs the world's biggest bond fund, and Ross, who invests in distressed companies, said they were buying municipal debt to take advantage of rising yields. Thirty-year tax-exempt yields rose 6 basis points to 4.89 percent after falling 18 basis points last week from a three-year high of 5.01 percent, Municipal Market Advisors data show.
More than 67 percent of auctions failed this week, based on data compiled by Bloomberg. The market became unhinged last month, after dealers who supported the securities for more than two decades stopped bidding for bonds investors didn't want. Auction rates jumped to 6.73 percent this month from an average 3.94 percent in the previous year, the Securities Industry and Financial Markets Association said.
``Nobody is giving me any inkling that it's getting any better,'' said Arnold Goldner, a 56-year-old owner of a jewelry repair business in Fort Lauderdale, Florida. Goldner said he hasn't been able to sell $5 million in auction-rate preferred bonds sold by closed-end funds from Nuveen Investments Inc. and BlackRock Inc., which borrow in the market alongside cities, hospitals, colleges and student lenders.
The SEC said it may let borrowers bid on their own auction- rate securities to help end the freeze and avoid breaking laws against market manipulation.
SEC `Guidance'
The agency is preparing ``guidance'' allowing them to join in auctions for the securities, whose yields are determined by bidding every seven, 28 or 35 days, as long as borrowers disclose ``price and quantity'' data about their bids, Erik Sirri, head of the SEC's trading and markets division, told the House Financial Services Committee March 12 in Washington.
Issuers from the Port Authority of New York and New Jersey to California's Department of Water Resources didn't wait for that help to start getting out of the auction market.
The Port Authority, the owner of bridges, tunnels, airports and transit facilities around New York City, sold $700 million of bonds March 12 to refinance auction securities after rates on the debt soared to 20 percent Feb. 12 from 4.3 percent the week before. California's water department sold $1 billion of revenue bonds backed by electric fees in another conversion.
Florida's Citizen's Property Insurance Corp., the state's largest property insurer, yesterday approved refinancing some of its $4.5 billion of auction securities with fixed-rate bonds and variable-rate demand notes.
Refusing to Buy
``I don't believe there's anyone in the auction-rate market today who if they had a choice to get financing somewhere else wouldn't be trying to get it,'' said Charles Grande, who manages $13 billion of municipal securities for Hartford Investment Management Co. in Hartford, Connecticut.
Investors and securities firms such as Zurich-based UBS AG and New York-based Goldman Sachs Group Inc. and JPMorgan Chase & Co. abandoned the market as losses tied to subprime mortgages and related securities threatened bond insurers' AAA ratings. The companies guarantee about half the $2.6 trillion of state and local government debt.
Municipal bonds had their worst month in 21 years in February, losing 4.6 percent, Lehman Brothers Holdings Inc. said. Top-rated, 30-year tax-exempt bonds yielded a record 59 basis points more than taxable Treasuries, according to data compiled by Municipal Market Advisors. A basis point is 0.01 percentage point.
Sparking Interest
Ross, chairman of WL Ross & Co., and Gross, chief investment officer of Pacific Investment Management Co., said they jumped at the chance to buy $1 billion of municipals each. Their interest helped to drive last week's rally in fixed-rate debt.
Investors remain concerned that a flood of new issues from borrowers refinancing auction-rate debt will overwhelm demand while hedge funds and banks pare their purchases, analysts at New York-based Citigroup Inc. said in a March 7 report.
This week's failure rate is in line with the 66 percent average since Feb. 12, data from Wilmington Trust Corp., Bank of New York Mellon Corp., Wells Fargo & Co. and Deutsche Bank AG show. When auctions fail, the interest borrowers pay reverts to penalty rates of more than 10 percent, or lower ones pegged to a money-market benchmark.
``Investors are being incredibly selective,'' Grande said.
Interest Doubles
The few that are bidding favor bonds that promise higher rates, leaving those with lower rate caps, such as closed-end funds' preferred debt, to languish, he said. Of the successful auctions, 90 percent had rates higher than 5 percent, Deutsche Bank analysts said in a March 7 report.
The interest on $74 million of Cleveland airport auction debt doubled to $634,000 this month versus last month, according to data compiled by Bloomberg. The city next month plans to convert its $437 million of auction debt.
``Things were getting more dire,'' said Elizabeth Hruby, Cleveland's debt manager. ``With variable-rate debt, you've got to be able to weather the storms, but this is fairly extreme.''
To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net.
