Because of unprecedented turmoil and uncertainty in global credit markets surfacing in late August 2007, the County halted all purchases of commercial paper. In early September 2007, the County commissioned an outside financial consultant, Public Financial Management (“PFM”), to review the Pool’s remaining investments in commercial paper and make recommendations going forward. PFM validated the County’s strategy of halting the purchase of any new commercial paper and recommended holding remaining assets to their maturity dates, while monitoring new developments in the commercial paper markets.
In early 2008, the County pool held four impaired commercial paper investments in its portfolio with an outstanding par value of $207 million. For three of the four impaired investments (Cheyne, Rhinebridge and Mainsail), the County has participated in restructuring auctions and has recovered a total of $75.2 million, or about 50 percent of the adjusted par value of these securities.
The County is waiting for the restructuring process to conclude for Victoria, the only outstanding commercial paper obligation remaining in the pool’s portfolio ($52.9 million adjusted par value). Since December 2008, the County has been receiving monthly pro rata cash payments from the receiver of Victoria totaling $12.5 million, reducing the County’s outstanding principal value to $40.4 million. Due to the stressed market conditions for this type of security, the County cannot predict what it may eventually recover from the upcoming restructuring of the Victoria investment. The formal restructuring is not expected to take place until late 2009, at the earliest. The Victoria investment has been segregated into a small “impaired pool” separate from the large “performing pool.” The impaired pool was established by the County to help account for the recovery of funds from the various restructuring auctions and post-auction residual cash payments.
The County has asked PFM to conduct quarterly reviews of all assets in the pool. In its most recent quarterly assessment, dated March 31 2009, PFM concluded that: “The county’s investment pool is of sound quality, well diversified and appears to have ample liquidity…The portfolio possesses very high credit quality.” The most recent portfolio review can be obtained at the following web site link:
http://www.kingcounty.gov/operations/Finance/news/CommercialPaper.aspx
Standard & Poor’s (“S&P”) first rated the Pool in 2005 and granted the Pool its highest rating of AAAf. In mid-January 2008, S&P took the temporary action of suspending its rating of the Pool with the understanding that the County could request a restored rating by separating any impaired investments into an impaired pool, which the County subsequently completed. S&P has since modified its rating criteria for investment pools, and the County is reconsidering the benefits and costs associated with a pool rating. The County will decide in the second half of 2009 whether to pursue a new S&P pool rating.
If you have any questions or need additional information please email or call Ken Guy, Director of Finance, at these contact numbers: Ken.Guy@kingcounty.gov or 206-263-9254.