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MOH » Topics » Our investments in auction rate securities are subject to risks that may cause losses and have a material adverse effect on our liquidity.These excerpts taken from the MOH 10-K filed Mar 16, 2009. Our
investments in auction rate securities are subject to risks that
may cause losses and have a material adverse effect on our
liquidity.
As of December 31, 2008, $70.5 million par value (fair
value of $58.2 million) of our investments consisted of
auction rate securities, all of which were securities
collateralized by student loan portfolios, guaranteed by the
U.S. government. We continued to earn interest on
substantially all of these auction rate securities as of
December 31, 2008. Due to events in the credit markets, the
auction rate securities held by us experienced failed auctions
beginning in the first quarter of 2008. As such, quoted prices
in active markets were not readily available during the majority
of 2008. We used pricing models to estimate the fair value of
these securities. These pricing models included factors such as
the collateral underlying the securities, the creditworthiness
of the counterparty, the timing of expected future cash flows,
and the expectation of the next time the security would be
expected to have a successful auction. The estimated values of
these securities were also compared, when possible, to valuation
data with respect to similar securities held by other parties.
We concluded that these estimates, given the lack of market
available pricing, provided a reasonable basis for determining
fair value of the auction rate securities as of
December 31, 2008.
As of December 31, 2008, we held $42.5 million par value
(fair value of $34.9 million) auction rate securities with
a certain investment securities firm. In November 2008, we
entered into a rights agreement with this firm that
(1) allows us to exercise rights (the “Rights”)
to sell the eligible auction rate securities at par value to
this firm between June 30, 2010 and July 2, 2012, and
(2) gives the investment securities firm the right to
purchase the auction rate securities from us any time after the
agreement date as long as we receive the par value.
We have accounted for the Rights as a freestanding financial
instrument and have elected to record the value of the Rights
under the fair value option of SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities. In
the fourth quarter of 2008, this resulted in the recognition of
a $6.9 million non-current asset, with a corresponding
increase to pretax income for the value of the Rights. To
determine the fair value estimate of the Rights, we used a
discounted cash-flow model that was based on the expectation
that the auction rate securities will be put back to the
investment securities firm at par on June 30, 2010, as
permitted by the Rights agreement.
Simultaneous to the recognition of the $6.9 million rights
agreement, we recorded an other-than-temporary impairment of the
underlying auction rate securities, and prior unrealized losses
on the auction rate securities that had been recorded to other
comprehensive loss through November 2008 were charged to income,
totaling $7.2 million. Also, at the time of the execution
of the Rights agreement and pursuant to SFAS 115, we
elected to transfer the underlying auction rate securities from
available-for-sale to trading securities. For the month of
December 2008, we recorded additional losses of $399,000 on
these auction rate securities. We expect that the future changes
in the fair value of the Rights will be substantially offset by
the fair value movements in the underlying auction rate
securities.
As of December 31, 2008, the remainder of our auction rate
securities, which are still designated as available-for-sale,
amounted to $28.0 million par value (fair value of
$23.3 million). As a result of the decline in fair value of
these auction rate securities, we recorded unrealized losses of
$4.7 million to accumulated other comprehensive (loss)
income for the year ended December 31, 2008. We have deemed
these unrealized losses to be temporary and attribute the
decline in value to liquidity issues, as a result of the failed
auction market, rather than to credit issues. Any future
fluctuation in fair value related to these instruments that we
deem to be temporary, including any recoveries of previous
write-downs, would be recorded to accumulated other
comprehensive (loss) income. If we
Table of Contents
determine that any future valuation adjustment was
other-than-temporary, we would record a charge to earnings as
appropriate.
Our
investments in auction rate securities are subject to risks that
may cause losses and have a material adverse effect on our
liquidity.
As of December 31, 2008, $70.5 million par value (fair
value of $58.2 million) of our investments consisted of
auction rate securities, all of which were securities
collateralized by student loan portfolios, guaranteed by the
U.S. government. We continued to earn interest on
substantially all of these auction rate securities as of
December 31, 2008. Due to events in the credit markets, the
auction rate securities held by us experienced failed auctions
beginning in the first quarter of 2008. As such, quoted prices
in active markets were not readily available during the majority
of 2008. We used pricing models to estimate the fair value of
these securities. These pricing models included factors such as
the collateral underlying the securities, the creditworthiness
of the counterparty, the timing of expected future cash flows,
and the expectation of the next time the security would be
expected to have a successful auction. The estimated values of
these securities were also compared, when possible, to valuation
data with respect to similar securities held by other parties.
We concluded that these estimates, given the lack of market
available pricing, provided a reasonable basis for determining
fair value of the auction rate securities as of
December 31, 2008.
As of December 31, 2008, we held $42.5 million par value
(fair value of $34.9 million) auction rate securities with
a certain investment securities firm. In November 2008, we
entered into a rights agreement with this firm that
(1) allows us to exercise rights (the “Rights”)
to sell the eligible auction rate securities at par value to
this firm between June 30, 2010 and July 2, 2012, and
(2) gives the investment securities firm the right to
purchase the auction rate securities from us any time after the
agreement date as long as we receive the par value.
We have accounted for the Rights as a freestanding financial
instrument and have elected to record the value of the Rights
under the fair value option of SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities. In
the fourth quarter of 2008, this resulted in the recognition of
a $6.9 million non-current asset, with a corresponding
increase to pretax income for the value of the Rights. To
determine the fair value estimate of the Rights, we used a
discounted cash-flow model that was based on the expectation
that the auction rate securities will be put back to the
investment securities firm at par on June 30, 2010, as
permitted by the Rights agreement.
Simultaneous to the recognition of the $6.9 million rights
agreement, we recorded an other-than-temporary impairment of the
underlying auction rate securities, and prior unrealized losses
on the auction rate securities that had been recorded to other
comprehensive loss through November 2008 were charged to income,
totaling $7.2 million. Also, at the time of the execution
of the Rights agreement and pursuant to SFAS 115, we
elected to transfer the underlying auction rate securities from
available-for-sale to trading securities. For the month of
December 2008, we recorded additional losses of $399,000 on
these auction rate securities. We expect that the future changes
in the fair value of the Rights will be substantially offset by
the fair value movements in the underlying auction rate
securities.
As of December 31, 2008, the remainder of our auction rate
securities, which are still designated as available-for-sale,
amounted to $28.0 million par value (fair value of
$23.3 million). As a result of the decline in fair value of
these auction rate securities, we recorded unrealized losses of
$4.7 million to accumulated other comprehensive (loss)
income for the year ended December 31, 2008. We have deemed
these unrealized losses to be temporary and attribute the
decline in value to liquidity issues, as a result of the failed
auction market, rather than to credit issues. Any future
fluctuation in fair value related to these instruments that we
deem to be temporary, including any recoveries of previous
write-downs, would be recorded to accumulated other
comprehensive (loss) income. If we
Table of Contents
determine that any future valuation adjustment was
other-than-temporary, we would record a charge to earnings as
appropriate.
Our investments in auction rate securities are subject to risks that may cause losses and have a material adverse effect on our liquidity. As of December 31, 2008, $70.5 million par value (fair value of $58.2 million) of our investments consisted of auction rate securities, all of which were securities collateralized by student loan portfolios, guaranteed by the U.S. government. We continued to earn interest on substantially all of these auction rate securities as of December 31, 2008. Due to events in the credit markets, the auction rate securities held by us experienced failed auctions beginning in the first quarter of 2008. As such, quoted prices in active markets were not readily available during the majority of 2008. We used pricing models to estimate the fair value of these securities. These pricing models included factors such as the collateral underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security would be expected to have a successful auction. The estimated values of these securities were also compared, when possible, to valuation data with respect to similar securities held by other parties. We concluded that these estimates, given the lack of market available pricing, provided a reasonable basis for determining fair value of the auction rate securities as of December 31, 2008. As of December 31, 2008, we held $42.5 million par value (fair value of $34.9 million) auction rate securities with a certain investment securities firm. In November 2008, we entered into a rights agreement with this firm that (1) allows us to exercise rights (the “Rights”) to sell the eligible auction rate securities at par value to this firm between June 30, 2010 and July 2, 2012, and (2) gives the investment securities firm the right to purchase the auction rate securities from us any time after the agreement date as long as we receive the par value. We have accounted for the Rights as a freestanding financial instrument and have elected to record the value of the Rights under the fair value option of SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. In the fourth quarter of 2008, this resulted in the recognition of a $6.9 million non-current asset, with a corresponding increase to pretax income for the value of the Rights. To determine the fair value estimate of the Rights, we used a discounted cash-flow model that was based on the expectation that the auction rate securities will be put back to the investment securities firm at par on June 30, 2010, as permitted by the Rights agreement. Simultaneous to the recognition of the $6.9 million rights agreement, we recorded an other-than-temporary impairment of the underlying auction rate securities, and prior unrealized losses on the auction rate securities that had been recorded to other comprehensive loss through November 2008 were charged to income, totaling $7.2 million. Also, at the time of the execution of the Rights agreement and pursuant to SFAS 115, we elected to transfer the underlying auction rate securities from available-for-sale to trading securities. For the month of December 2008, we recorded additional losses of $399,000 on these auction rate securities. We expect that the future changes in the fair value of the Rights will be substantially offset by the fair value movements in the underlying auction rate securities. As of December 31, 2008, the remainder of our auction rate securities, which are still designated as available-for-sale, amounted to $28.0 million par value (fair value of $23.3 million). As a result of the decline in fair value of these auction rate securities, we recorded unrealized losses of $4.7 million to accumulated other comprehensive (loss) income for the year ended December 31, 2008. We have deemed these unrealized losses to be temporary and attribute the decline in value to liquidity issues, as a result of the failed auction market, rather than to credit issues. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive (loss) income. If we
Table of Contentsdetermine that any future valuation adjustment was other-than-temporary, we would record a charge to earnings as appropriate. These excerpts taken from the MOH 10-K filed Mar 17, 2008. Our
investments in auction rate securities are subject to risks that
may cause losses and have a material adverse effect on our
liquidity.
As of December 31, 2007, $82.1 million of our total
$242.9 million in short-term investments were comprised of
municipal note investments with an auction reset feature
(“auction rate securities”). These notes are issued by
various state and local municipal entities for the purpose of
financing student loans, public projects and other activities;
they carry a AAA credit rating. $74.1 million of the
$82.1 million are secured by student loans which are
generally 97% guaranteed by the U.S. Government under the
Federal Family Education Loan Program (FFELP). In addition to
the U.S. Government guarantee on such student loans, some
of the securities also have separate insurance policies
guaranteeing both the principal and accrued interest. Liquidity
for these auction rate securities is typically provided by an
auction process which allows holders to sell their notes and
resets the applicable interest rate at pre-determined intervals
up to 35 days. Recently, auctions for some of these auction
rate securities have failed and there is no assurance that
auctions on the remaining auction rate securities in our
investment portfolio will succeed. An auction failure means that
the parties wishing to sell their securities could not be
matched with an adequate volume of buyers. In the event that
there is a failed auction the indenture governing the security
requires
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the issuer to pay interest at a contractually defined rate that
is generally above market rates for other types of similar
short-term instruments. The securities for which auctions have
failed will continue to accrue interest at the contractual rate
and be auctioned every 7, 28, or 35 days until the auction
succeeds, the issuer calls the securities, or they mature. As a
result, our ability to liquidate and fully recover the carrying
value of our auction rate securities in the near term may be
limited or not exist. All of these investments are currently
classified as short-term investments. If the credit ratings of
the security issuers deteriorate or if normal market conditions
do not return in the near future, we may be required to reduce
the value of these securities through an impairment charge
against net income and reflect them as long-term investments on
our balance sheet for the period ending March 31, 2008 or
thereafter.
As of February 29, 2008, the Company held
$75.6 million of auction rate securities.
$71.1 million of these securities are secured by student
loans which are generally 97% guaranteed by the
U.S. Government under FFELP.
Our investments in auction rate securities are subject to risks that may cause losses and have a material adverse effect on our liquidity. As of December 31, 2007, $82.1 million of our total $242.9 million in short-term investments were comprised of municipal note investments with an auction reset feature (“auction rate securities”). These notes are issued by various state and local municipal entities for the purpose of financing student loans, public projects and other activities; they carry a AAA credit rating. $74.1 million of the $82.1 million are secured by student loans which are generally 97% guaranteed by the U.S. Government under the Federal Family Education Loan Program (FFELP). In addition to the U.S. Government guarantee on such student loans, some of the securities also have separate insurance policies guaranteeing both the principal and accrued interest. Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals up to 35 days. Recently, auctions for some of these auction rate securities have failed and there is no assurance that auctions on the remaining auction rate securities in our investment portfolio will succeed. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction the indenture governing the security requires
Table of Contentsthe issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar short-term instruments. The securities for which auctions have failed will continue to accrue interest at the contractual rate and be auctioned every 7, 28, or 35 days until the auction succeeds, the issuer calls the securities, or they mature. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited or not exist. All of these investments are currently classified as short-term investments. If the credit ratings of the security issuers deteriorate or if normal market conditions do not return in the near future, we may be required to reduce the value of these securities through an impairment charge against net income and reflect them as long-term investments on our balance sheet for the period ending March 31, 2008 or thereafter. As of February 29, 2008, the Company held $75.6 million of auction rate securities. $71.1 million of these securities are secured by student loans which are generally 97% guaranteed by the U.S. Government under FFELP. | EXCERPTS ON THIS PAGE:
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