Mainsail Fact Sheet
November 30, 2007
Office of the State Treasurer Mainsail II Investment Fact Sheet November 30, 2007
State Cash Pool When there is excess money in the State Treasury that is not needed to meet current obligations, the Treasurer of State invests those amounts as authorized by State law. (5 M.R.S.A.§135).
The cash pool contains 105 state funds (including the General Fund, Highway fund, other state funds and component units).
The average daily balance of the State cash pool totaled more than $675,000,000 in fiscal year 2007. The current (11/20/07) balance of the cash pool is $760,000,000.
Annual Cash Pool Earnings
FY 06/07: $63,778,170.51 (FY 07 rate of return - 5.12%.)
FY 08/09 (as of 10/31/07): $12,152,389.10
Earnings are distributed to participating funds monthly on a pro-rata basis.
Investments Cash pool investments are governed by statute (5 M.R.S.A. §135) and policy - (http://www.maine.gov/treasurer/cashmanagement/investmentpolicy.html ), which emphasize flexible and conservative investments.
Commercial Paper: A debt instrument issued by a corporation with a fixed maturity of no more than 270 days. Treasurer’s Policy on allowable commercial paper investments: “Prime Commercial Paper with a maturity not exceeding 180 days from the date of purchase which is rated by at least two rating agencies and the ratings must be at least A-1 by Standard and Poor's, P-1 by Moody's, or F-1 by Fitch at the time of purchase. If the commercial paper issuer has senior debt outstanding, the senior debt must be rated by each service that publishes a rating on the issuer of at least A by Standard and Poor's, A2 by Moody's, or A by Fitch.”
MAINSAIL PURCHASE DETAILS
Mainsail II Commercial Paper On August 8, 2007, $19,930,361.11 of cash pool funds were invested in Mainsail II Commercial Paper with a scheduled maturity of August 31, 2007. This position represented approximately 3% on the cash pool.
The Commercial Paper was sold to the state by Mary Ruch, a financial advisor with Merrill Lynch, who indicated that the investment met the state’s investment criteria. The Mainsail Commercial Paper was rated A1+ and P1 by Standard & Poor’s and Moody’s, indicating the highest possible credit rating. The holding was for 23 days at an interest rate of 5.45%, a typical rate for commercial paper in the market that day.
This investment was made in accordance with State law and State investment pool policy under which the maximum investment allowed in any single issuer of commercial paper is 5% and ratings of A1 and P1 or better are required.
Rating agency downgrade happened after Mainsail asset freeze.
On August 20, 2007 Bank of New York, Mainsail’s Trustee conducted a capital test. Mainsail failed the test and as a result Bank of New York froze its assets, which resulted in the state’s Mainsail position being frozen. On August 21, 2007 Standard and Poor’s changed its highest rating (P1+) to B (sub-prime).
Imprudent to sell “senior debt” at this time. The State has had expressed interest from investors in buying out its position in Mainsail. The state holds “senior” Mainsail debt and expects to be paid in full. Given this, it would be imprudent to sell the position a fire sale price. As of Nov. 26, 2007, Bank of New York, the investors' trustee in Mainsail, has appointed investment bank Houlihan Lokey Howard & Zukin to find buyers for its assets.
Minimal budget impact expected. The potential impact on state finances from the Mainsail situation would be reduction in future cash pool earnings, which are also impacted by the amount of money in the cash pool and the short-term interest rate environment.