Even big businesses are victims of the auction-rate security freeze

It is not only "rich" individual investors who are suffering from "freezer burns" from auction-rate securities which are frozen due to failed actions, but a fair number of big businesses as well. The latest quarterly financial press release from Best Buy says that the company reclassified $417 million in auction-rate securities from short-term assets to "non-current assets":

Investments in Auction-Rate Securities

At March 1, 2008, Best Buy held $417 million (par value) of investments in auction-rate securities, the vast majority of which are AAA/Aaa-rated and collateralized by student loans guaranteed 95 percent to 100 percent by the U.S. government.

In mid-February 2008, market auctions, including substantially all of the company's auction-rate securities portfolio, began to fail due to insufficient buyers. As a result of the persistent failed auctions, and the uncertainty of when these investments could be successfully liquidated at par, the company reclassified all of its investments in auction-rate securities to non-current assets within equity and other investments in its unaudited condensed consolidated balance sheet at March 1, 2008.

Best Buy continues to evaluate whether these investments are appropriately valued at par and will conclude its analysis prior to filing its Annual Report on Form 10-K for fiscal 2008, which will be no later than April 30, 2008. If any of the company's auction-rate securities are deemed to be temporarily impaired, the valuation for that security will be reduced, and the reduction will not impact earnings, but be reflected in accumulated other comprehensive income, a component of shareholders' equity.

The company continues to believe that it will ultimately recover all amounts invested in these securities given their high credit quality. Management does not believe the current illiquidity of these investments will have a material impact on Best Buy's ability to execute its business plans as described below in the outlook for fiscal 2009. Excluding investments in auction-rate securities, the company had $1.4 billion in cash and cash equivalents and $2.4 billion available under its unsecured revolving credit agreement at March 1, 2008.

The key point here is that well-run companies never (or at least very rarely) put all of their eggs in one basket. $417 million may be a lot of money, but having $1.4 billion in cash and (true) cash equivalents gives them a lot more flexibility and maneuvering room than if they did what apparently quite a few individuals did by putting all of their cash into auction-rate securities.

In short, big business is not immune from mistakes, but typically does enough risk assessment and risk management to avoid putting the whole enchilada at risk.

It will be interesting to see whether any of these companies will be forced to revalue their ARS positions below par.

-- Jack Krupansky