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CalPERS Mulls Doubling Credit Enhancement

SAN FRANCISCO - With profits rising in the business of enhancing credit for variable-rate debt, a California Public Employees' Retirement System committee is slated to vote Monday on whether to double the authorized size of the system's credit enhancement program.

The program offers letters of credit and liquidity support for issuers of variable-rate debt. CalPERS, the nation's largest public pension fund, created the credit enhancement program in 2005.

The proposal before CalPERS' investment committee would expand the credit enhancement program's permitted capacity to $10 billion from $5 billion, and eliminate a $250 million cap on single transactions.

Though the program's ultimate capacity would double, CalPERS has not thus far even come close to its current limit, so far supporting about $2 billion of debt, according to the staff report prepared for the committee.

"It gives staff more discretion," said CalPERS spokesman Clark McKinley. "It's always done on an opportunistic basis, so it doesn't necessarily mean there'll be dumping a lot of money in there any time soon."

All three rating agencies "have been consulted and are on board" with the proposed policy revisions, the staff report said.

"The municipal market has recently faced significant turmoil as a result of downgrades of some of the monoline insurance providers and failure of the auction-rate market. As a result, municipalities have found it difficult to secure credit and liquidity enhancement for their debt issuance, which has resulted in higher financing costs," the report said. "For these reasons, staff has seen a significant pick-up in demand for enhancement facilities and an increase in pricing."

When the credit enhancement program was initiated, it was envisioned that the credit enhancement program would have a maximum exposure of about 3% to 5% of CalPERS' total asset base; with about $245 billion in assets, even a $10 billion commitment would be within that range.

CalPERS' consultant Wilshire Consulting also endorsed the proposed change in a letter from managing director Michael Schlachter.

"Since mid-2007, the 'credit crunch' currently underway has resulted in considerable strain on debt issuers and much greater potential for CalPERS to achieve better returns," he wrote.

A proposal to have CalPERS participate in the creation of a new monoline bond insurer is on the investment committee's closed session agenda Monday.

The idea, mulled publicly in March by California Treasurer Bill Lockyer, was also on the closed session portion of the committee's previous meeting in May. CalPERS' McKinley said he could not comment.

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