Credit Enhancement: CalPERS, With Bank of New York, to Close on 1st Public

May 18, 2005, 2:00 a.m. EDT 2 Min Read

The California Public Employees' Retirement System, in partnership with the Bank of New York, expects to close on its first public credit facility next month, according to Kevin Dunphy, managing director at the Bank of New York.

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The Bank of New York currently serves as agent on the pension fund's credit business. It also serves in a similar capacity on the $2 billion credit business for the California State Teachers' Retirement System. To that end, the Bank of New York, which signed agreements last year to serve as agent for both pension funds, serves as agent on a portfolio of credit enhancement deals that could potentially total $7 billion, Dunphy said, speaking at The Bond Buyer's Derivatives/Short-Term Finance Institute in New York yesterday.

CalPERS, which allocated $5 billion to the municipal credit enhancement market earlier this year, has completed about $450 million in private deals since it launched the business in January. With its AAA ratings from Fitch Ratings in September and similar ratings from Moody's Investors Service in January, CalPERS is set to close as the liquidity provider on $60 million of a deal totaling $120 million, Dunphy said, declining to disclose the issuer. The Bank of New York will serve as liquidity provider on the balance of the transaction.

Dunphy said that the Bank of New York participates on every deal that CalPERS participates on in order to show that their interests are aligned.

CalPERS and the Bank of New York formed an agreement last year whereby the bank originates, structures, and administers credit transactions for the pension plan. In using the Bank of New York as its agent, CalPERS is able to capitalize on the firm's expertise in the sector.

The entrance of CalPERS into the market provides a new source of capacity that is highly rated, Dunphy said at the conference. He said that the highest rating for most banks offering letters of credit, liquidity facilities, and stand-by purchase agreements is double-A.

"Issuers would enjoy a lower interest expense because of the superior trading value that CalPERS enjoys because of its higher ratings," Dunphy added. Dunphy also said that the participation of CalPERS in the market also provides issuers with a "scarcity premium" because the pension fund represents a new name in the market.

CalPERS is able to offer its products nationally, while CalSTERS offers credit enhancement to issuers in California and contiguous states. Dunphy said that the bank is currently in ongoing discussions to serve in an agent capacity, with other public pension funds.