Despite the state treasury’s Short -Term Investment Fund’s (STIF) AAA rating, it may experience significant losses as a result of the nation’s current credit crisis. Two investments — through Citigroup and in Cheyne Finance in which the fund holds $400 million — have been the focus of concern by ratings agencies in recent months.
In the treasury’s latest quarterly report, it cites problems with a $100 million investment in Cheyne Finance, which Standard & Poor’s recently downgraded to a D rating. Such a rating means that the ratings agency does not expect Cheyne to repay on the commercial paper in which the state invested.
The treasury also holds $300 million in structured investment vehicles (SIVs) through Citigroup, which Moody’s said this week it is reviewing and may possibly downgrade. SIV funds raise cash by selling short-term debt and then buying longer-term and high-yielding securities.
State Treasurer Denise L. Nappier posted online an open letter to the fund’s municipal investors and state citizens on Dec. 5, stating that the treasury is “monitoring the situation carefully,” and that its Short-Term Investment Fund “continues to hold a high level of liquidity.”
In regard to its $300 million investments with Citigroup, Nappier said that despite a possible ratings downgrade, the treasury has been informed that the state has retained the value of its investment.
As of October, 137 municipalities and more than 265 local government entities were investing in the treasury’s Short-Term Investment Fund, valued at $5.8 billion. Its popularity among such organizations and towns stems from STIF’s AAA Standard & Poor’s rating, its high liquidity and its $52 million in reserves to absorb any potential loss.
The treasury maintains that the current fiscal woes of Cheyne and Citigroup do not present a problem for the state as a whole.
“The reserve is certainly one factor that gives us extra security,” said state Assistant Treasurer Lawrence Wilson.
And now that precious dollars from smaller pockets are in danger, Wilson says there’s a “good chance” the state will have to tap into that reserve for the first time in the fund’s 35-year history.
Should $52 million not cover all the damage done, the fund also holds more than $2.2 billion in easily accessible investments, an amount that exceeds the full balance of municipal deposits, Wilson said.
However, to help soothe the financial sore, the state has adjusted its investment strategy for the fund, Wilson said. It has shortened maturity dates, increased liquidity and moved away from certain investment programs that were particularly affected by the credit market collapse.
“There’s been a commensurate effect on our yield,” Wilson said. But the state said it will continue with the changes until things settle down.
Plus, Wilson added, the state is the fund’s largest investor, a fact that he believes says a lot about its security.
Municipal reaction has varied. Some have reported withdrawing from the fund or withholding investments until more information is acquired. Others remain unsure as to what course they will take.
West Hartford invested in the treasury’s Short-Term Investment Fund, to the tune of about $49 million. Town finance director Chris Johnson said he’s been following the situation closely over the past two months, and he’s pleased with the moves the fund has made to reduce its subprime exposure.
“It certainly gives you pause to think about and consider,” Johnson said. “But [the state is] playing with their money too,” he added, as the state is the fund’s largest investor. It gives some comfort to know that the state has good reason to make wise financial decisions.
“To this point, it has not impacted us,” said Cortney Keegan, finance director for Windsor, which has sunk $27 million into STIF. In regard to its investments, Windsor’s policy is safety first, then liquidity, then yield, Keegan added. Those priorities will determine any future financial moves.
