Managing Investments

1
Managing Investments Debt In a Wacky Market

• Storm Clouds are Gathering
• Ken Durham
• Sara Shippee
• July 16, 2008

2
SIFMA as Percentage of LIBOR
3
Fannie Mae/Freddie Mac

• Words from the source as to bail out
  possibilities
• Good news bad news?
• Stock investments for either lost value
  possibly for units with expanded authority
• Debt securities interest rates have varied by
  as much as 125 basis points but still solid
  investment over the year

4
FDIC

• These days it is important to know your bank be
  it hometown or the mega banks
• Know how insurance limits apply to your accounts
  at each institution
• 100,000 for non-interest bearing demand acct.
• 100,000 for all interest bearing accounts
  including CDs and interest checking

5
Know/Understand Your Investments

• Example NC Student Education Assistance
  Authority
• Long term bonds with short term interest rate
  reset mechanism
• Underwriting documents clearly disclose the risk
  of auction rate failures
• Ask yourself if there is a risk element that is
  rewarding you for a few extra basis points
• Are you comfortable can you explain to your
  boss?
• Concentration is also part of a prudent decision

6
Investment Policy

• Considering recent developments does your policy
  need to be revised?
• Do you have concentration risk is it set at the
  proper levels for your units tolerance?
• Does your policy require mark to market valuation
  more frequently than once a year?
• Has your unit become too dependent on interest
  earnings as a revenue stream rather than revising
  tax rates or fees?
• Does your policy require you to keep your
  Governing Board fully informed?

7
NCSEAA Investment Disclosures

• NC State Education Assistance Authority
• Auction rate bonds with15 to 30 year maturities
• Historically the interest rate reset every
  7, 28 or 35 days
• At that time could be redeemed at par
• Until February 2008 when auctions began to
  fail
• Suddenly became illiquid with no secondary market
• Will require additional disclosures at June 30
  for 30 or more units who hold these investments

8
NCSEAA Investment Disclosures

• Taxable bonds of 700 million to be called in
  July
• No solid news on tax exempt bonds we dont
  think there are many units with these but we have
  no facts hearsay is that some will be called
  soon

9
NCSEAA Disclosures at 6/30
--- Dont worry about it ---
10
NCSEAA Disclosures at 6/30

• Deposit Investment Example
• The North Carolina (N.C.) State Agency
  instruments in the portfolio have final stated
  maturities ranging from 2015 to 2036 however,
  historically they could be redeemed at par and
  the interest rate reset every 28 days making the
  effective maturity date the next reset date,
  until February 2008 when the auctions began
  failing. At that time the instruments became
  illiquid and there was no secondary market.
• Can be included in Interest rate risk section or
  following chart of securities

11
NCSEAA Disclosures at 6/30

• Subsequent Event Example
• The North Carolina State Education Assistance
  Agency instruments in the portfolio having final
  stated maturities ranging from 2015 to 2036 have
  been called effective July xx, 2008 resolving the
  matter of illiquid investments for the
  County/City.

12
NCSEAA Disclosures at 6/30

• MDA Disclosures If material tax-exempt notes
  are held by the unit additional disclosures must
  be included
• Clarify that there are restrictions on the use of
  assets (illiquid) not apparent on the face of the
  financial statements
• Coming year section Mention any information
  regarding refinancing or expected calls

13
Debt Considerations

• COPS (Certificates of Participation Securities)
  are seldom being issued in recent months because
  of collapse of bond insurance companies and
  limited market liquidity
• Replaced by private placement financings
• Fewer documents and no underwriter required
• Shorter timeline from beginning to end
• Probably lower costs of issuance but continue to
  compare rates with public placement rates
• Need bids, permits board authorizations before
  LGC approval

14
Debt Considerations

• Cost over runs on bond projects
• Have become a way of life always have a Plan B
• Recent GO issue for Schools had expected 60
  million bond issue but bids came in at 90
  million.
• Required re-designation of projects to be
  financed with GOs and made provisions for
  alternate financing for remainder of projects

15
Debt Considerations

• When to sign construction contracts for bond
  funded projects?
• Be sure you have legal authority fully in place
• Dont get pressured to be in a hurry by the
  Community political situation
• Dont forget about the timing of LGC approval
  (Contact LGC before going out to bid)

16
Debt Considerations

• Bond Insurance
• The nightmare is not over!!!
• Additional rating downgrades are likely
• Presently only two AAA rated bond insurance
  companies operate in NC
• Secondary market disclosure is required for bond
  issues that have bond insurance (as shown in the
  original offering statement) from a provider that
  is downgraded (i.e. if multiple agency ratings
  then each downgrade requires a separate
  continuing disclosure)

17
Debt Considerations

• Interest Rate Swaps units rated AA or higher
• Generally not seen in fixed rate issues
• Frequently present in variable rate financings
• NC Statutes require a Swap policy to be adopted
  by the governing board
• Swap advisors play critical role in both the
  pricing and the documentation of the Swap
• Financial statement disclosure of certain risks
  unique to Swaps are required and pending
  standards will require placement on the Statement
  of Net Assets

18
Debt Considerations

• Commercial paper financings
• Easy to describe
• Hard to administer
• Guessing on the direction of interest rates
• Units rated AA or higher

19
Debt Considerations

• Variable Rate Remarketing
• So far no major challenges with these type
  financings
• Be sure to track where your financing resets each
  period
• Communicate with your remarketing agent if you
  have ANY concerns about a reset
• Units rated AA or higher

20
Debt Considerations

• Arbitrage Calculations
• Still an important issue with each and every tax
  exempt financing Both public private
• Occasionally the required calculations have been
  overlooked
• Set up a calendar of when calculations are due
  and who is responsible for determining the
  calculations have been done on a timely basis
• Small issuer exemption may apply
• If questions, talk to bond counsel

21
Investment Considerations
for Bond Proceeds

• Some NC Banks are offering competitive rates for
  depository accounts for bond proceeds
• One financial institution is offering a full
  rebate calculation in conjunction with bond
  proceeds deposit account

22
Odds Ends

• Safekeeping arrangements - Reminder
• The brokers cannot be your custodians under any
  circumstances
• Be sure you have a custodial agreement with all
  your custodians
• Review the fees you are paying competition is
  great!