CalSTRS Credit Enhancement Program 2013 Annual Report
CalSTRS Credit Enhancement Program 2013 Annual Report
Credit Enhancement Program Team: Margot Wirth, Director of Private Equity; Seth Hall, Portfolio Manager; Richard Rose, Portfolio Manager; Jean Kushida Uda, Investment Officer; Kathleen Williams, Investment Officer; John-Charles Gish, Investment Officer
CalSTRS Credit Enhancement Program Objectives
- Generate fee income
- Strive for zero losses
- Maintain low risk, high quality portfolio
- Diversification
Required Skills for Program Management
- Extensive knowledge of the credit enhancement industry
- Knowledge of the municipal bond industry and structuring
- Credit analysis skills
- Awareness of factors that influence credit enhancement markets
Credit Enhancement Program Staff Responsibilities
- Implement board policy relating to the Credit Enhancement Program
- Manage the risk profile of the program
- Develop and implement program objectives
- Seek out high quality transactions
- Develop business relationships
- Assess and recommend policy revisions
- Conduct credit analyses and due diligence
- Oversee all operational duties
Director’s Summary
The Credit Enhancement Program commenced in 1994 with the purpose of generating additional fee income for CalSTRS by underwriting credit instruments (e.g., letters of credit, lines of credit) on variable rate municipal debt. Over this timeframe, the availability of credit in the capital markets and the banking system has fluctuated.
Program Background
The CalSTRS Credit Enhancement Program is an off-balance sheet component of CalSTRS Investments. The CEP conducts its business in the short-term, variable rate municipal bond market. The primary objective of the program is to earn fee income through the enhancement of high quality municipal financings, such as tax-exempt bonds, industrial development bonds, tax and revenue anticipation notes, and commercial paper.
Program Management Philosophy
The Credit Enhancement Program management philosophy is to credit enhance investment grade transactions with an expected underwriting objective of zero losses. The CEP mitigates underwriting risk by carefully analyzing potential investments and by partnering with another financial institution. CalSTRS conducts its own due diligence, including a thorough credit analysis of the obligor, and presents its findings to an investment review committee. Credit approval by CalSTRS’ partner as well as by the CEP’s investment review committee is required before a transaction is underwritten.
Program Performance Results
Over its 20-year history, the Credit Enhancement Program has earned $101.3 million for the Fund. At calendar year-end 2013, CEP commitments totaled $1.2 billion, a decline of approximately 28 percent from the previous year, and the annual net fee income was $10.5 million, approximately a 15 percent decrease over the 2012 level.
Program Performance Highlights
- $10.5 million in annual net fee income
- Average net fee income is approximately 72 basis points
- Portfolio of $1.2 billion
Private Equity Credit Enhancement Program Glossary
Glossary of acronyms used in this report.