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Mainsail2007

Mainsail2007

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Published by Bryan P. Sears
2007 letter from Baltimore County Administrative Officer Fred Homan to the Baltimore County Council outlining a failed 2007 investment in a fund known as Mainsail II LLC.
2007 letter from Baltimore County Administrative Officer Fred Homan to the Baltimore County Council outlining a failed 2007 investment in a fund known as Mainsail II LLC.

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Categories:Types, Letters
Published by: Bryan P. Sears on Apr 25, 2012
Copyright:Attribution Non-commercial

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04/26/2012

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BALTIMORECOUNTY
MARY.LAIlD
JAMES
T.
SMJTII.
JR.
COjJJll)'
Executive
FREDHOMAN
AdmtnistrativeOfficer
.November26,
2007
TheHonorableS.G.Samuel
Moxley
Chairman
Baltimor~CountyCoti@).400WashingtonAvenue'Towson,
MD'21204',DearChairmanMoxley:
OnAugust
24,2007,
commercialpaperissuedbyMainsailITLLCandownedbyBaltimoreCountywitha
par
valueof$21.3millionfailedtopayoffatmaturity.TheCounty
purchased
thecommercialpaperfromMerrillLynchon
July
31,2007.Atthetimeofthepurchase,thecommercialpaperwasratedA-l+
by
Standard
&
Poor's(S&P)and
P-l
by
Moody'sInvestorsService(Moody's),thehighestshort-termratingsforcommercialpaper.ThepurchaseoftheMainsailcommercialpaperwasconsistent
with
theCounty'sInvestmentPolicy,adoptedbyCountyCounoilResolutionNo.44-95,anda
permissible
investmentofCountyfundsunderStatelaw(Section6-222oftheStateFinanceandProcurement
of
the
Annotated
CodeofMaryland;Section22ofArticle95ofthe
AnnotatedCode
of
Mary
Jan
d),
BACKGROUND
.Thepurchaseof
commercial
paper
is
permittedunderMarylandlaw.TheAnnotated
Code
ofMaryland
authorizes
the
governing
body
of
eachcountyto
invest
in
commercialpaper
thathasreceivedthehighestletterandnumericalrating
by
atleasttwonationallyrecognizedstatisticalratingorganizationsasdesignated
by
theUnitedStatesSecuritiesandExchange
Commission,provided
that
such
commercialpaper
doesnot
exceed
10%ofthetotalportfolio.
Maryland
lawwaschangedOctober
I,
2006to
increase
commercialpaper
exposure
from5%to10%andtorequire
that
thecommercialpaperinvestmentbe
rated
bytworatingagencies,rather
than
oneaspreviouslyrequired.This'recentlegislationexpandedtheabilityof-countiestoinvest
in
commercialpaper,while
atthesametime
increasing
the
importance
of
ratingagency
reviews.
in
thisprocess.
 
November26,2007
Page
2of6Mainsailissuedcommercialpaper-short-termdebt-toinvest
in
higher-yielding,
longer-'
datedassetsconsistingprimarilyofresidentialandcommercialmortgage-backedsecurities.
This
typeofcommercialpaperisknownasasset-backed'andaccountsforapproximatelyhalfofthecommercialpapermarket,
In
July
aboutaquarterof
all
asset-backedcommercialpaperhadmortgages
as
collateral.Someofthesemortgagesweresubprimeloans.Theterm"subprime"
refers
to
the
credit
statusofthe
borrower(beinglessthanideal),nottheinterestrateontheloan
itself.
Adeclininghousingmarket,
in
combinationwithhomeownerswithpoorcredithistories'
or
heavydebt
loads,
causeddefaults
torisesignificantly,
reaching
almost14
percent
of
U.S;subprimemortgages.duringthefirstquarterof2007.Thisdevelopmentpromptedinvestorstoavoidsecuritiesbacked
by
mortgagesaridresulted
in
themarketforthesesecuritiestoevaporate.
In
addition,
declines
in
thissectorofthecreditmarketledtoreduceddemandfor
corporareIoans.
,Thebreakdownofthecorporatecommercial'papermarketbecameacrisis
as
banksconfronteddifficultyobtainingshorttermfinancing.Withthisvolatility
in
the
market,
Mainsailwasunable
.to
rollovermaturingcommercialpaper.Thesecuritytrustee,theBank
of
NewYork,nowhascontroloverthisentity.Theconditions
in
thesubprimemortgagemarketcausedMoody'sandS&PtodowngradeMainsail
In
Augustofthisyear..S&PratingswentfromA1+toA-3onAugust21andtoB,short-termnon-investmentgrade,onAugust24.Moody'sdroppedthecommercialpaperratingfrom
P-l
to"notprime",
its
short-termnon-investmentgraderatingonAugust22:Thesedowngradeswerepartofmassivedowngradesofsubprime.mortgage-Iinkedsecurities
by
thethreeratingagencies,includingFitch
Ratings
(Fitch).Investorshavecriticizedtheratingagenciesbothfortheirinitialratingsonsomeofthesesecuritiesandforfailingtorealizethesituationsoonersoastodowngrade
subprime
mortgagebondsafter
it
becameclear
that
defaultswould-surpassinitialestimates,
It
is
believed
that
theseratingagencyactions.led
to
theeliminationofliquidity
in
thecommercialpapermarket
by
raisingdoubtsabouttheabilityofobligorstomeettheirobligations
and
thereliabilityofcommercialpaperratingswhichhave
historically
beenessentialtotheorderlyfunctioningof
this
market.TheSecuritiesandExchangeCommissionbasbegunaninvestigationtodeterminewhethertheratingagenciesfollowedproperproceduresforratingmortgage-backedsecurities,ThemarketvalueofthecollateralthatbackedMainsail'spaperandthemanner
in
whichtheCountyeventuallyreceivespaymentbasnotyetbeendetermined,Mainsailbasoutstandingcommercialpaperobligationsof$1.3billionandat
this
time,noneofthecollateral
has
been
liquidated.OnSeptember6
th,
BarclaysCapital,
Britain's
thirdlargestbankthatstructuredtheMainsailinvestmentvehicle
in
2006.proposedarestructuringtorepaycommercialpaperholders
in
full;however,thatproposalwasnotapprovedbyitsstakeholders.
Also,
theSecuredPartiesholdingthemajorityoftheMainsailcommercialpaperhaveinstructedtheBankofNewYork,theSecurityTrusteefortheMainsailcommercialpaper,nottomakeanydistributionspriortoa
 
,.:-I
November26,2007Page
3
of6certaindate.Thatdatehasmoved4times(Oct1,Oct22,Nov16andDec14).Althoughnotimeframe
has
beenindicatedfor
thefinal
resolutionofthe
Mainsail
commercialpaper,themost
likely
financingalternatives
include:
1-
Restructuringthecommercialpapertoalongermaturity,potentially
in
therangeof2-4
years;
2-Making
interim
distributionstothe
investorswheneverprincipal
and
interest
from
the.underlying
securitiesare
paid
(althoughthis
couldcomplicateeffortsto
restructure).
At
this
.pointapproximately$100million
is
available.,.3~Selling
the
collateralandpaytheinvestorswiththeproceeds.However,atthistime,there
is
nomarketfor
these
securities.
BALTIM"ORECOUNTY
ACTIONS
While
not
all
asset
backed
commercial
paper
has
beendowngradedbytheratingagencies.andsubjectedtoliquidityproblems,uponnotificationofthebreachoftheMainsailcommercialpaperonAugust27th,theCounty
sold
·theremaining
$40
millionparvalueofcommercialpaperas
a
precaution.Thesesecuritieswereasset-backedbutunre1atedtothe
Mainsail
commercial
paper-andtherespective
issuingentities
have
continuedtobeviable,TheCountycurrentlyholdsnootherdirectinvestmentsofcommercialpaperandhasno
plans
topurchaseanycommercial.paperatthistime.TheCounty
is
currentlyinvesting
in
thehighestratedU.S.governmentmoneymarket
funds..
Withresolutionof
the
Mainsaildistributionpotentiallyaslongasseveralyearsaway,(assumingarestructuringtoasecurity
with
alongermaturity),theCounty
bas
discussed
with
itsfinancialadvisor,bondcounselandtheratingagenciesthetransfer
of
theMainsailcommercial
paper
to
the
Police,
Fife&11d
Widows'
(PFW)
Pension
Fundfor
theparvalue
of
$21.3million.
Taking
into
account
thegreaterneed
for
liquidityin
the
investmentoffundsheldforgeneralCountypurposesascomparedtofundsheldtoprovidepaymentofmorepredictablelong-termobligations.,thePFW
Pension
Fundismoresuitablefor
holding
securitiesoverseveralyears'thantheinvestment
pool
ofcurrent
revenues
thatwasusedtopurchasethecommercialpaper.ThePFWPensionFundwas
funded
by
theCountyin1988to
provide
totheCountyasourceoffundstofundthepaymentof(theretofore)unfundedpensionobligationstopoliceofficersandfirefighters(andtheirsurvivingspouses)hiredpriortoOctober1,1959whochosenotto
join
theEmployees'Retirement
System
ofBaltimoreCounty(PensionObligations),At
the
timeoftheoriginal
funding
ofthisaccount,thefundhadassetsof$170million
ana
afteralmost20yearsofoperationstillbasassetstotaling
$
I29milliontosupporttheremaining392retirees/beneficiaries,Therewere704retirees/beneficiariesand25activeemployeeswhentheaccountwasoriginallyfunded.Clearly,thefundhasa
long
investmenthorizoninseekingtomatchtheinvestments
in
thefundtopredictablelong-termPensionObligations.TheC-ounty

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