SAN FRANCISCO - As the California Public Employees' Retirement System prepares to enterthe credit enhancement business, it can point to a gilt-edged rating.
Fitch Ratings this week was the first rating agency to weigh in on the program,assigning it a long-term rating of AAA and an F1-plus short-term rating.
"They've set up a very diverse program," said Fitch analyst Mike McDermott. "It shouldgenerate some income for them and be very safe."
CalPERS' plans call for it to issue up to $1 billion in credit enhancement, via direct-pay letters of credit and standby lines of credit, in any fiscal year, with a $5 billiontotal cap on total credit enhancement, according to Fitch.
"They have assets currently of more than $160 billion," McDermott said.
The scale of the enhancement program is modest compared to the resources of theretirement plan, which handles the retirement programs of more than 1,500 Californiagovernment entities.
"They have access to $1 billion in cash on a daily basis plus over $3 billion in highlyliquid assets they can call upon," he said. "Their pension obligations are very longterm in nature and the guarantees are short term."
Further bolstering the ratings are conservative guidelines that limit the program tomunicipal issuers with a track record of investment-grade ratings, as well as limits tosector exposure and single-borrower exposure, according to the Fitch report.
All three agencies were asked to rate the program, according to a CalPERS staff report,but Standard & Poor's and Moody's Investors Service have not issued ratings yet.
Speaking generally, Moody's analyst Martin Duffy said the public pension sector has bothcapacity and opportunity to enter the credit enhancement market.
"Basically the banks have kind of stepped back from the market," he said.
The CalPERS investment committee approved the program in 2003, then chose to sponsorlegislation to clarify the system's authority to offer credit enhancement. That bill wassigned last month by Gov. Arnold Schwarzenegger, on an urgency basis, meaning it tookeffect immediately.
Since the program was approved, CalPERS has revised the original relationship it plannedwith Bank of New York, according to a staff report prepared for a CalPERS investmentcommittee meeting this week.
As it stands now, BNY will act as service agent to provide backroom services to theprogram.
Originally, BNY was to act as both sole servicer and sole deal originator, but CalPERSnow plans to work with other financial institutions to "create a broader and diversedeal sourcing and co-investment capability," the report said. It cited industry changesthat include the departures of key personnel at BNY, specifically Jon Greenlee, JeffHeckman and Joel Heller, who left BNY for the public finance department at CitibankGlobal Markets Inc.
The retirement system projects annual fee income of about $12 million, based on a $3billion portfolio size, according to an analysis prepared by state Assembly staff.
The California State Teachers Retirement System, CalSTRS, already offers a creditenhancement program.
