white knight of Acution-Rate Market

Money-market funds are emerging as a potential white knight for some troubled auction-rate securities. Auction-rate securities are debt investments that reset their interest rates as regularly as every seven to 35 days. In recent weeks, the $330 billion market for such securities has seized up, leaving many investors unable to cash out. That's where tax-exempt municipal money-market funds come in. They hold conservative short-term debt offerings and are subject to strict rules that typically prevent them from owning auction-rate securities. Now there is an effort under way to convert auction-rate securities into more-liquid investments that would be acceptable to municipal money-market funds. The effort would benefit the money-market funds, which have been struggling in recent weeks to find attractive securities amid problems with the bond insurers backing many of their normal holdings. Converting auction-rate securities into money-fund eligible investments is often done under the original bond documents. The biggest sticking point could be that the borrower of the auction-rate securities or another financial institution must agree to buy the securities in the event no other buyers emerge. That backstop is what essentially differentiates auction-rate securities from investments called variable-rate demand notes that can be held by municipal money-market funds. But with financial institutions suffering losses, few may want to step up and take on that risk. In some of the first deals, the borrowers using the auction-rate securities are providing the backing, rather than an outside financial institution. Restructurings are happening on a "deal-by-deal" basis says Federated's Ms. Cunningham. The Georgia Power unit of Southern Co., for instance, recently had $700 million in tax-exempt auction-rate securities, and is now in the process of converting about $500 million of that into variable-rate demand notes, says David Brooks, managing director of capital markets at Southern. As the auction-rate market "got really ugly," in recent weeks, "we started putting out conversion notes," he says. Georgia Power priced about $33 million of the converted securities yesterday, and was planning to price another $100 million today and tomorrow that would be money-fund eligible. Rather than use an outside bank guarantee, it issued the new securities with the backing of its own credit. The benefit of such a move is lower borrowing costs than have recently been available in the auction-rate market. The pricing yesterday, for instance, was approximately 2.70%, while the borrower had recently seen auction rates from 5% to 7%.