During this LGC-203 reporting cycle we noted that more than 35% of units with investments in commercial paper were holding commercial paper that was rated below the highest available rating. The rating had been downgraded by one or more of the three nationally recognized rating agencies.
As a reminder, N.C. Gen. Stat. 159-30(c)(6) provides the standard for permitted investments in commercial paper – “Prime quality commercial paper bearing the highest rating of at least one nationally recognized rating service and not bearing a rating below the highest by any nationally recognized rating service which rates the particular obligation.” (emphasis added)
LGC staff reviews the ratings of three nationally recognized rating agencies:
- S&P Global Ratings (spglobal.com)
- Moody's - credit ratings, research, and data for global capital markets (moodys.com)
- Fitch Ratings: Credit Ratings & Analysis for Financial Markets
If, on the date of purchase, the commercial paper is rated below the highest available rating by any of these three agencies, it is not a permitted investment per G.S. 159-30(c)(6). Reminder: It is the responsibility of the finance officer per GS159-25.(a)(6) to supervise the investment of idle funds of the local government or public authority. This includes knowing the commercial paper rating given by all the rating agencies at the date of the commercial paper investment.
We have noted that Fitch sometimes rates commercial paper lower than Moody’s or S&P. The LGC interprets N.C. Gen. Stat. 159-30(c)(6) to mean that prior to investing in commercial paper, units must examine the commercial paper ratings of any nationally recognized rating service that rates the commercial paper investment being considered.
In addition, recently we were informed that some brokers are providing the ratings of commercial paper “programs”. We have noted that a rating agency may assign a rating to an institution’s commercial paper program different from the rating it assigns to the institution’s short-term commercial paper. G.S. 159-30(c)(6), as written, requires examining the rating of an individual commercial paper obligation, not the institution’s commercial paper program.
REPORTING
In both LGC-203 reporting periods (as of June 30 and as of Dec. 31), units with any amounts entered on the “Additional Investments” tab must upload a supplemental schedule. The schedule may be an Excel spreadsheet, custodian statement, or ticker report, and must include the following detailed information (as applicable):
- Name of third-party custodian
- Name of investment – so that LGC staff can easily identify the security
- Purchase amount of each investment
- Market value of each investment as of report date
- Purchase date of each investment
- Maturity date of each investment
- Commercial paper rating on date of purchase
Many units report the Moody’s and S&P ratings of their commercial paper but do not provide Fitch ratings. If Fitch rates the commercial paper held by the unit, the unit must report that rating as well.
Please share this guidance with your unit’s investment broker and request that, prior to investment and for unit LGC-203 reporting, the broker provide you with the short-term commercial paper ratings (and not commercial paper program ratings) of all the nationally recognized rating agencies (including Fitch) that assign a rating to the commercial paper investment you are considering.