Sync hro nizing Inv e stm e nt Po rtfo lio Cash Flo w w ith Planne d Re v e nue s and Expe nditure s

Transcription

1 Sync hro nizing Inv e stm e nt Po rtfo lio Cash Flo w w ith Planne d Re v e nue s and Expe nditure s Targeted Cashflo w Inv e stm e nt Strate g y Pre se ntatio n fo r CMTA Annual Co nfe re nc e April 2 4,

2 Effective Cashflow Management THREE TOPICS TODAY Targeted cashflow investment strategy Bond proceeds/draw schedule cashflow matching Pre-refund soon to be called Agencies Page 2

3 Effective Cashflow Management Reduce interest rate risk Improve portfolio returns Increase income Maintain sufficient liquidity for contingencies Stress the portfolio to see shift in cashflow Consider opportunity costs Page 3

4 Targeted Cashflow Concepts Operational revenues Planned expenditures Reserve for contingencies Interest income Principal payments Opportunity costs Page 4

5 Operational Cashflow Revenues from all sources except portfolio income Planned expenditures from all sources Detail is not critical 5 year projection investment horizon Subset of the normal budget/projection process Growth rates consistent with historical trends Page 5

6 Operational Cashflow annual layout + Revenues: FY 2008 FY 2013 Taxes Fees, etc. Total Operating Revenues - Planned expenditures: FY 2008 FY 2013 Payroll Debt service Insurance, energy, etc. Total Expenditures = NET OPERATIONAL CASHFLOW Page 6

7 Operational Cashflow OPERATIONAL CASHFLOW ANALYSIS Dec-٠٨ Dec-٠٩ Dec-١٠ Dec-١١ Dec-١٢ Revenue from All Sources - except interest income from investments ٤٥,٠٠٠,٠٠٠ ٤٦,٨٠٠,٠٠٠ ٤٨,٦٧٢,٠٠٠ ٥٠,٦١٨,٨٨٠ ٥٢,٦٤٣,٦٣٥ Planned Expenditures, including debt service ٥٠, ٠٠٠, ٠٠٠ ٥٢, ٥٠٠, ٠٠٠ ٥٥, ١٢٥, ٠٠٠ ٥٧, ٨٨١, ٢٥٠ ٦٠, ٧٧٥, ٣١٣ Operational Cashflow surplus or shortfall (٥,٠٠٠,٠٠٠) (٥,٧٠٠,٠٠٠) (٦,٤٥٣,٠٠٠) (٧,٢٦٢,٣٧٠) (٨,١٣١,٦٧٧) Traditional income and expense items All debt service is included in expenses Consolidate various operating entities Page 7

8 Existing Investment Portfolio Cashflow INVESTMENT ANALYSIS Total Portfolio Size = $١٦,٧٦٠,٠٠٠ Investment Cash Flows from Existing Portfolio Holdings - Maturity Dec-٠٨ Dec-٠٩ Dec-١٠ Dec-١١ Dec-١٢ Principal ١٠,٧٦٠,٠٠٠ ٣,٠٠٠,٠٠٠ ٢,٠٠٠,٠٠٠ ٠ ١,٠٠٠,٠٠٠ Interest ٥٣٠,٠٠٠ ٢٦٢,٠٠٠ ١٣٤,٠٠٠ ٥٠,٠٠٠ ٥٠,٠٠٠.٠٠ Portfolio Cash Flow ١١,٢٩٠,٠٠٠ ٣,٢٦٢,٠٠٠ ٢,١٣٤,٠٠٠ ٥٠,٠٠٠ ١,٠٥٠,٠٠٠ Separate portfolio cashflow from operational cashflow Portfolio cashflow offset shortfalls/manage excess cash Effective cashflow management reduces interest rate risk Avoid calling the market - cashflow needs dictate investment strategy Page 8

9 Total Net Cashflow Initial operating cash position $25 million Subsequent cash is carried over from previous period Operating cash separate from investment portfolio Net cashflow is starting point for investment strategy Each year generates excess cash Page 9

10 Cashflow example ١٣,٠٠٠ ١١,٠٠٠ ٩,٠٠٠ ٧,٠٠٠ ٥,٠٠٠ ٣,٠٠٠ ١,٠٠٠ (١,٠٠٠) (٣,٠٠٠) (٥,٠٠٠) (٧,٠٠٠) (٩,٠٠٠) OPERATIONAL & PORTFOLIO CASHFLOW $٠٠٠ Operation CF Investment CF ١١,٢٩٠ ٣,٢٦٢ ٢,١٣٤ ١,٠٥٠ ٥٠ (٥,٠٠٠) (٥,٧٠٠) (٦,٤٥٣) (٧,٢٦٢) (٨,١٣٢) ٢٠٠٨ ٢٠٠٩ ٢٠١٠ ٢٠١١ ٢٠١٢ ٣٥,٠٠٠ ٣٠,٠٠٠ ٢٥,٠٠٠ NET CASHFLOW $٠٠٠ ٣١,٢٩٠ Including Initial Cash Position ٢٨,٨٥٢ ٢٤,٥٣٣ ٢٠,٠٠٠ ١٧,٣٢١ ١٥,٠٠٠ ١٠,٠٠٠ ١٠,٢٣٩ ٥,٠٠٠ ٠ ٢٠٠٨ ٢٠٠٩ ٢٠١٠ ٢٠١١ ٢٠١٢ Page 1 0

11 Targeted Investment Strategy Positive slope to yield curve Pick-up yield by extending (invested return is greater than cash return) Use initial cash on hand Use a portion of cash; in 2 5 year maturity range Consistent cashflows next 5 years Retain $10 million in flexibility each year Page 1 1

12 Callable Agency example: Security that meets investment standards April ٧, ٢٠٠٨ Agency Offering FNMA ٣ ٣/٤ ٠٤/١٥/١٣ Description FNMA ٣ ٣/٤ ٠٤/١٥/١٣ Par Amt $٠٠٠ CUSIP Current Coupon Maturity Price OAS Yield (YTW) ٥,٠٠٠ ٣١٣٦F٩GR٨ ٣.٧٥٠% ١٥-Apr-١٣ ١٠٠.٠٠٠ ١٠٠ ٣.٧٦٨% Issue Date Amt. Issued $٠٠٠ Rem Maturity Yrs Eff Duration Modified Dur Convexity YTM YTC (Next) ٤/١٥/٢٠٠٨ ٢٥,٠٠٠ ٥.٠٢ ٤.١٥ ٤.٦١-٠.٧٧ ٣.٧٧% ٣.٧٩% CALL DETAILS Orig. Maturity Years COUPON DETAILS Call Type Callable Call Days Notice ١٠ ٥. ٠٠ Coupon Type FIXED ١st Call Date ٤/١٥/٢٠١٠ Orig. lockout Months Current Coupon ٣.٧٥٠% Call Frequency Onetime Months - Next Call ٢٤.٢ ٢٤ Next Cpn. Pay Date ١٠/١٥/٢٠٠٨ Callability Still Callable Yield to Next Call ٣.٧٩% Next Call Date Apr ١٥ ٢٠١٠ Next Call Price ١٠٠.٠٠ NOTES BOOK-ENTRY. TREASURY Call Feature Onetime SPREAD Effective Duration Spread Relative to TREASURY & AGENCY BULLET Yield Curves ١.٢٦% ٤.٧٩% Call Schedule Date Price AGENCY ٤.٢٩% ٤/١٥/٢٠١٠ ١٠٠ BULLET SPREAD ٠.٥٨% ٣.٧٩% ٣.٢٩% ٢.٧٩% ٢.٢٩% ١.٧٩% ١.٢٩% ٣ Mo ١ Yr ٢ Yr ٣ Yr ٥ Yr ٧ Yr TREASURY Yield Curve FNMA ٣ ٣/٤ ٠٤/١٥/١٣ AGENCY Bullet Curve ١٠ Yr ١٥ Yr Page 1 2

13 New Investment Strategy - Securities $20 million strategy Description FHLB ٣ ١٠/١٥/١٠ FHLB ٣ ١/٢ ٠٤/٢٥/١١ FNMA ٣ ٥/٨ ٠٤/١٦/١٢ FNMA ٣ ٣/٤ ٠٤/١٥/١٣ Issuer FEDERAL HOME LOAN BANK FEDERAL HOME LOAN BANK FANNIE MAE FANNIE MAE Amount $٠٠٠ ٥, ٠٠٠ ٥, ٠٠٠ ٥, ٠٠٠ ٥, ٠٠٠ CUSIP ٣١٣٣XQPF٣ ٣١٣٣XQPC٠ ٣١٣٦F٩GV٩ ٣١٣٦F٩GR٨ Current Coupon ٣.٠٠٠ ٣.٥٠٠ ٣.٦٢٥ ٣.٧٥٠ Maturity ١٥-Oct-١٠ ٢٥-Apr-١١ ١٦-Apr-١٢ ١٥-Apr-١٣ Price* ١٠٠.٠٠٠ ١٠٠.٠٠٠ ١٠٠.٠٠٠ ١٠٠.٠٠٠ YTW ٣.٠٠ ٣.٥٠ ٣.٦٢ ٣.٧٤ OAS* ٩٣ ١٣١ ١٠٤ ٩٨ Convexity -٢.٧٩-٤.٦٥-٢.٢٥-٠.٨٧ Eff. Duration ١.٦٥ ١.٥٠ ٢.٩٥ ٤.١٢ Remaining Maturity Yrs ٢.٥ ٣.٠ ٤.٠ ٥.٠ CALL DETAILS Call Still Callable Still Callable Still Callable Still Callable Call Feature Onetime Quarterly Onetime Onetime Next Call Date ١٥-Oct-٠٨ ٢٥-Jul-٠٨ ١٦-Apr-٠٩ ١٥-Apr-١٠ Months to Next call ٦.٢ ٣.٦ ١٢.٣ ٢٤.٢ Yield to Next Call ٣.٠٠% ٣.٥٠% ٣.٦٣% ٣.٧٥% Second Call Date - ٢٥-Oct-٠٨ - - ISSUE DETAILS Issue Amount $mil ١٥.٠ ٢٨٥.٠ ٥٠.٠ ٢٥.٠ Issue Date ١٥-Apr-٠٨ ٢٥-Apr-٠٨ ١٦-Apr-٠٨ ١٥-Apr-٠٨ Original Maturity Yrs ٢.٥ ٣.٠ ٤.٠ ٥.٠ ١st Call in months ٦ ٣ ١٢ ٢٤ COUPON DETAILS Coupon Type FIXED FIXED FIXED FIXED Page 1 3

14 Incremental CF - Targeted investment $20 million investment Callable Agencies Laddered maturities conservative CF analysis Investment Cash Flows from "NEW" Portfolio Holdings - Maturity Dec-٠٨ Dec-٠٩ Dec-١٠ Dec-١١ Dec-١٢ Principal ٠ ٠ ٥,٠٠٠,٠٠٠ ٥,٠٠٠,٠٠٠ ١٠,٠٠٠,٠٠٠ Interest ٦٩٤,٠٠٠ ٦٩٤,٠٠٠ ٦١٨,٧٥٠ ٤٥٦,٢٥٠ ٢٧٨,١٢٥ NEW Portfolio Cash Flow ٦٩٤,٠٠٠ ٦٩٤,٠٠٠ ٥,٦١٨,٧٥٠ ٥,٤٥٦,٢٥٠ ١٠,٢٧٨,١٢٥ Page 1 4

15 Targeted - New Total Net Cashflow Total Cashflow - all sources Dec-٠٨ Dec-٠٩ Dec-١٠ Dec-١١ Dec-١٢ Initial Cash, then onging cash position ٥, ٠٠٠, ٠٠٠ ١١,٩٨٤,٠٠٠ ١٠,٢٤٠,٠٠٠ ١١,٥٣٩,٧٥٠ ٩,٧٨٣,٦٣٠ Operational Cashflow surplus or shortfall (٥,٠٠٠,٠٠٠) (٥,٧٠٠,٠٠٠) (٦,٤٥٣,٠٠٠) (٧,٢٦٢,٣٧٠) (٨,١٣١,٦٧٧) Net Cash Position (shortfall) ٠ ٦,٢٨٤,٠٠٠ ٣,٧٨٧,٠٠٠ ٤,٢٧٧,٣٨٠ ١,٦٥١,٩٥٣ Original Portfolio Cash Flow ١١,٢٩٠,٠٠٠ ٣,٢٦٢,٠٠٠ ٢,١٣٤,٠٠٠ ٥٠,٠٠٠ ١,٠٥٠,٠٠٠ NEW Portfolio Cash Flow ٦٩٤,٠٠٠ ٦٩٤,٠٠٠ ٥,٦١٨,٧٥٠ ٥,٤٥٦,٢٥٠ ١٠,٢٧٨,١٢٥ Running Subtotal Cashflow surplus or shortfall ١١,٩٨٤,٠٠٠ ١٠,٢٤٠,٠٠٠ ١١,٥٣٩,٧٥٠ ٩,٧٨٣,٦٣٠ ١٢,٩٨٠,٠٧٨ Consistent volume of net cash each year Eliminate need for guessing maturity of next investment purchase Ultimately reduce investment risk Page 1 5

16 Stress Cashflow Securities with optionality where receipt of principal can vary (e.g. callable Agencies or MBS) must be analyzed from an interest rate risk standpoint Prepare to hold security to maturity Prepare to have security called Flexible into investment strategy Stress - interruptions in operation revenues Page 1 6

17 Stress Investment Cashflow Test cashflow at call date rather than maturity First call date is sufficient Securities Call Date Dec-٠٨ Dec-٠٩ Dec-١٠ Dec-١١ Dec-١٢ Running Subtotal Cashflow - Securities at CALL DATE ٢١,٧٣٠,٦٢٥ ٢٦,٤٦٠,٧٥٠ ٢٦,٢٨٦,٧٥٠ ١٩,٠٢٤,٣٨٠ ١٠,٨٩٢,٧٠٣ Drop in rates produces much greater cashflow BUT if strategy is targeted cashflow, continue to readjust investment strategy to deal with new cashflow from called bonds. Page 1 7

18 Opportunity Costs Maintaining excess cash opportunity cost; if rates fall investment income declines As rates fall, temptation to reach for yield, i.e. longest maturities and/or shortest call Vulnerable to cashflow shortfall Estimate of 5 year incremental income from targeted CF Rates Income Difference Flat ٤٦٣,٧٨١-١٠٠ ٦١٨,٣٧٥ +١٠٠ ٢٢٤,٨٥٠ Page 1 8

19 Cashflow New callable Agencies Cash Flow Management Rate Change Horizon: INSTANTENOUS Report Date: April ٧, ٢٠٠٨ Portfolio Market Value: $٢٠,٠٠٠,٠٠٠ ANNUAL CASH FLOW $٠٠٠ - Next ٥ Years ANNUAL Total Principal Cash Flow NO CHANGE in RATES RATES UP RATES DOWN Date TOTAL PRINCIPAL CF +١٠٠ basis points +٥٠ basis points -٥٠ basis points -١٠٠ basis points Year ١ ٥,٠٠٠ ٠ ٠ ١٠,٠٠٠ ١٠,٠٠٠ Year ٢ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ Year ٣ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ Year ٤ ٥,٠٠٠ ١٠,٠٠٠ ١٠,٠٠٠ ٠ ٠ Year ٥ ٠ ١٠,٠٠٠ ١٠,٠٠٠ ٠ ٠ ANNUAL CASH FLOW - Next ٥ YEARS ٣ Scenarios - Rates UP, FLAT, DOWN ١٢,٠٠٠ ١٠,٠٠٠ ١٠,٠٠٠ ١٠,٠٠٠ ١٠,٠٠٠ ٨,٠٠٠ ٦,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٥,٠٠٠ ٤,٠٠٠ ٢,٠٠٠ ٠ ٠ Year ١ Year ٢ Year ٣ Year ٤ Year ٥ ٠ ٠ ٠ +٥٠ basis points ٠ basis points -٥٠ basis points Page 1 9

20 Targeted Cashflow Strategy Refinements Monthly or quarterly cashflow schedule Use both bullets and callables to target cashflow As securities are called or mature re-target As operational cashflows change re-target Consolidate Use straightforward spreadsheet analysis Formally adopt cashflow targeting as an investing policy Page 2 0

21 Cashflow Matching: Bond Proceeds / Draw Schedule

22 Bond Proceeds / Draw Schedule Critical: Match investment cashflow with the bond proceeds draw schedule Bullets are best alternative no optionality Maintain initial cash cushion Maximize investment income Segregate draw schedule from the rest of the portfolio? Page 2 2

23 Draw Schedule Securities Listing Security Listing for Draw Schedule CUSIP Issuer Par $000 Current Maturity Maturity Price* YTW Eff Dur Coupon Years 3134A4XV FRESTP 100, /19/ CPR FNMASC 200, /1/ XCFH FHLB 200, /22/ XHHW FHLB 200, /19/ XACQ FHLB 200, /27/ MTQ FNMA 1,000, /17/ A4VH FHLMC 1,000, /19/ EAAL FHLMC 1,000, /16/ XJXU FHLB 1,000, /20/ EAAQ FHLMC 2,000, /5/ XKLY FHLB 1,715, /24/ Page 2 3

24 Draw Schedule Cashflow Portfolio Strategy Group April 4, 2008 City / County DRAW SCHEDULE REPORT TOTAL Funds $000: 15,000,000 Securities Par: 13,000,000 - Draw Schedule - Cash / Money Market: 2,000,000 - Investment / Schedule - - Cash Flows - Date $ Amount $ Par Value Maturity Descrip Interest Income Investment CF Net CF Mar , ,000,000 1,900,000 Apr , ,463 43,463 1,743,463 May , ,125 58,125 1,601,588 Jun ,000 1,000, Jun-2008 FRE CPN STRIP 19,309 1,019,309 2,420,897 Jul , ,875 40,875 2,261,772 Aug-08 1,000,000 3,000,000 1-Aug-2008 FNMA GEN STRIP 31,875 3,031,875 4,293,647 Sep-08 1,000, , Sep-2008 FED HOME LN BANK 24, ,625 3,818,272 Oct-08 1,000,000 1,000, Oct-2008 FED HOME LN BANK 53,463 1,053,463 3,871,734 Nov-08 1,000,000 3,000, Nov-2008 FANNIE MAE 58,125 3,058,125 5,929,859 Dec-08 2,000, , Dec-2008 FREDDIE MAC 19, ,309 4,784,169 Jan-09 1,715, , Jan-2009 FREDDIE MAC 20, ,875 3,925,044 Feb-09 2,350, , Feb-2009 FED HOME LN BANK 12, ,500 2,087,544 Mar-09 2,000, ,000 5-Mar-2009 FREDDIE MAC 11, , ,419 Apr-09 2,035,000 1,830, Apr-2009 FED HOME LN BANK 43,463 1,873, ,882 Total Draw: 15,000,000 13,000,000 Investment Par Coupon Income 437,881 15,437,881 Page 2 4

25 Investment Strategy: Pre-refund soon to be called bonds

26 Pre-refund callable Agencies Sell callables with high probability of call at a price above par Bonds are going to be called Realize gain on the sale Reinvest into longer duration securities Pick-up income over the time to the next call Page 2 6

27 Pre-refund securities comparison STONE & YOUNGBERG Portfolio Strategy Group Fix ed In c o m e Tr a n s a c t io n R epo r t Pre-Refund Example Settlement: April 8, 2008 LISTING/DESCRIPTION OF TRANSACTION SECURITIES - Characteristics of securities sell and securities purchase PORTFOLIO SECURITIES - SELL BOOK Par Coupon Maturity Duration WAL Next Call Book Yield Book Value MARKET Market Value Market Yield Yield to Call WAL to Call GAIN/LOSS Totals / Averages 5,000, % 11-Oct Sep % 5,002,045 5,044, % 3.07% ,055 Next Bk. TEY Book Market Market Market Yield WAL Gross CUSIP Description Par Coupon Maturity Duration WAL Call Yield Value Price Value Yield to Call to Call G/L 3128X6MQ6 FREDDIE MAC DOMESTIC MTN 4,000, % 01-Oct Oct % 4,002, ,042, % 3.03% , XN6E4 FEDERAL HOME LOAN BANK US 1,000, % 23-Nov May % 1,000, ,002, % 3.25% ,100 Gross G/L Next Purchase Market Market Yield to WAL to BUY SECURITIES Par Coupon Maturity Duration WAL Call YTW Value Yield Call Call Totals / Averages 5,087, % 03-Apr Apr % 5,086, % 4.00% 0.99 Next Purchase Market Market Market Yield WAL CUSIP Description Par Coupon Maturity Duration WAL Call YTW Price Value Yield to Call to Call 31331YA83 FEDERAL FARM CREDIT BANK U 5,087, % 03-Apr Apr % ,086, % 4.00% 0.99 Page 2 7

28 Pre-refund securities comparison STONE & YOUNGBERG Portfolio Strategy Group Fix ed In c o m e Tr a n s a c t io n R epo r t Pre-Refund Example TRANSACTION EVALUATION - Comparison of the attributes of the securities sold versus securities purchased Settlement date: April 8, 2008 Amount Sold/Purchased Reinvestable Funds Buy - Sell Takeout/Payout Market Value of Securities Sold: 5,044,100 Market Value of Securities Sold: 5,044,100 Reinvestable Funds: 5,086,155 - Book Value of Securities Sold: 5,002,045 + Gain on Sale: 42,055 - Market Value of Securities Purchased: 5,086,155 = Gross Gain/Loss: 42,055 = Reinvestable Funds: 5,086,155 = Cash Payout / (Takeout): 0 Performance Comparison: Buy vs Sell - weighted averages Book Market Stated Final Yield WAL Amount Amount Coupon WAL Maturity Duration to Call to Call Market Yield Book Yield BUY (Yield = YTW) 5,086,155 5,086, % Apr % % 4.00% SELL 5,002,045 5,044, % Oct % % 5.09% DIFFERENCE 84,110 42, % % % -1.09% Opportunity Costs: comparative cash flow / income analysis [based on WAL bonds sold] Shortest WAL Bonds purchase/sold: 0.41 Income difference over WAL: (21,167) Approximate Income bonds purchased over WAL: 84,151 Gain (Loss) on Sale: 42,055 Approximate Income bonds sold over WAL: 105,319 Income advantage over WAL: 20,888 Buy vs. Sell Yield and Duration Comparison 5.30% 5.10% 5.09% 4.90% Yield 4.70% 4.50% 4.30% 4.10% 4.00% 3.90% Duration Sell Securities Buy Securities Sell Portfolio Yield Buy Portfolio Yield Page 2 8