California Debt and Investment Advisory Commission Shortterm and
California Debt and Investment Advisory Commission Short-term and Interim Financing Strategies Seminar Jeffrey Thiemann Charles Schwab Investment Management January 12, 2011
Money Market Funds: A Few Key Facts Money market funds are governed by Rule 2 a-7 of the Investment Company Act of 1940. Rule 2 a-7 imposes limits on money market funds for credit quality, diversification, and maturity. § Funds may invest only in high quality “eligible securities” § Exposures to a single issuer generally limited to no more than 5% of total fund assets § Maturity limits on both individual securities and of the overall weighted average portfolio 2
Money Market Funds: A Few Key Facts Credit Quality § Eligible securities limited to securities rated in the two highest short-term rating categories by Moody’s, S&P, and Fitch, or if unrated, that are of comparable credit quality. § At least 97% of assets must be “First Tier” securities, which are defined as securities that are rated in the highest short-term rating category by these agencies (e. g. , MIG 1, SP-1 or SP-1+, and F 1 or F 1+), or if unrated, of comparable credit quality. § Regardless of ratings, the fund’s investment advisor must independently determine that these investments present “minimal credit risk”. 3
Money Market Funds: A Few Key Facts Diversification § Requirements vary depending on type of fund (taxable, national tax-exempt and single state tax exempt). § For taxable and national tax-exempt funds, investment in securities issued by an issuer is limited to 5% of total fund assets. For single state funds, that 5% limitation applies to 75% of the fund’s total assets. § The rule includes additional diversification requirements for securities with demand features and guarantees (e. g. , bond insurance and letters of credit). Maturity § Securities must have a remaining maturity of 397 days or less (i. e. , 13 months). § Securities with a nominal maturity date in excess of 397 days may be eligible under some circumstances. Bonds that are subject to a demand feature (e. g. , variable rate demand obligations) may be “deemed” to mature on the date in which the principal amount must be paid through the demand feature. § Rule 2 a-7 limits the dollar-weighted average portfolio maturity (WAM) to 60 calendar days. 4
California Tax and Revenue Anticipation Notes (TRANs) Minimal credit risk standard for investment in money market funds. Other investment considerations: § Ability to maintain Tier 1 status through the investment period § Liquidity of the name in the overall market Minimum information requirements: § Actual cash flow results for the prior fiscal year § Projected cash flow for the current fiscal year § Borrowable resources or other sources of additional liquidity, both current and projected § Historical financial results, e. g. , general fund GAAP and/or unaudited results § Proposed or enacted budget 5
California Tax and Revenue Anticipation Notes (TRANs) Key metrics: § TRANs size, relative to projected receipts § Set aside dates; coverage at set-asides § Net projected debt service coverage (gross vs. net) § Unused cash relative to total disbursements 6
California Tax and Revenue Anticipation Notes (TRANs) Evaluating the credibility of cash flow projections: § Is there sufficient detail by major line item to test the reasonableness of the projection? § What are the key assumptions? § How does growth or decline compare relative to historical experience? § How have the projections incorporated known revenue/expenditure impacts (e. g. , state deferrals)? § Does the projected cash flow projection square with the proposed/enacted budget? § Ability to confirm cash balances, including alternate liquidity cash balances, with audited financial information? § Do I understand the derivation and availability of the alternative liquidity? Continuing disclosure: § Cash flow actual performance vs. projection § Other available financial information 7
Other Short-term Debt Instruments § Commercial Paper (bank vs. self liquidity) § Variable Rate Demand Obligations (VRDOs) § Bond Anticipation Notes (BANs) 8
- Slides: 8