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SVB Asset Management Money Market Instruments

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  • 1. SVB Asset Management Money Market Instruments As corporate cash managers, many instruments are at our disposal to meet our clients’ investment objectives. We recommend utilizing a complete set of money market instruments to maintain a well diversified portfolio, with the goal of capital preservation and liquidity.. A select set of money market instruments is provided to illustrate the various financing vehicles used by governments, government-sponsored agencies and corporations to bridge the gap between expenditures and cash receipts. TYPES OF MONEY MARKET INSTRUMENTS • Commercial Paper (CP): A promissory note with a fixed maturity of one to 270 days, usually sold at a discount from face value o The bulk of the CP issued is for maturities of less than two months o CP provides funds for working capital needs, bridge financing for plant and equipment expenditures and funding corporate takeovers o Minimum lot transaction is $100,000, but most paper is bought in million dollar blocks o Rated by credit agencies that evaluate the liquidity, cash flow, profitability, and backup credit availability of the issuing entity Role of Commercial Paper o An extremely liquid market ($1.59 trillion market as of Y/E 2008) with various access points Investments could be placed directly with the issuers and provides flexibility to match maturities (day-specific). Indirect access through broker-dealers is also an option o Due to the size of this market, liquidation prior to maturity is competitively priced with a narrow bid/ask spread by issuers and broker-dealers • Certificate of Deposit (CD): A certificate issued by a bank, that shows a specific amount of money has been deposited at the issuing institution. The CD bears a specific maturity date, interest rate, and denomination. o Issued either in a negotiable (i.e., investor can sell the CD in open market prior to the maturity date) or nonnegotiable form o A CD with a maturity of one year or less pays interest at maturity, whereas a medium-term CD will pay semi-annually o An alternative to CP, BAs, and agency discount notes • Bankers’ Acceptances (BAs): A draft or bill of exchange accepted by a bank to guarantee payment of the bill. BAs are often issued by banks as a byproduct of a foreign trade transaction and incorporate the use of a letter of credit issued against a specific set of imported goods. o Sold at a discount and redeemed by the accepting bank at full face value at maturity o Technical difference between BAs and Commercial Paper (CP): CP is backed by the creditworthiness of the issuing entity, whereas BAs are backed by the underlying goods or products that are being financed o An alternative to CP, CDs, and agency discount notes 185 Berry Street Suite 3000 San Francisco, California 94107 U.S.A. SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley PHONE 866.719.9117 svb.com Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value. 0609-0186 © 2009 SVB Asset Management.SM All rights reserved. Rev. 06.2009
  • 2. SVB Asset Management Money Market Instruments • Federal Agency Securities or Government-sponsored enterprises (GSEs): These financing entities created by Congress to fund loans to certain groups of borrowers such as homeowners, farmers and banks. Through the creation of GSEs, the government has sought to address various public policy concerns regarding the ability of members of these groups to borrow sufficient funds at affordable rates. Debt securities issued by GSEs are solely the obligation of their issuer and, unless explicitly stated, do not carry any guarantee by the federal government. However, as a group, GSEs benefit from a perceived tie to the federal government and have enjoyed implicit support from the government. Fannie Mae and Freddie Mac’s senior debtholders have seen the government support increase in the midst of the 2008-2009 credit crisis. o Outside of the Treasury market, the federal agency market is the second most liquid market. o Agency discount notes usually range in maturity from five to 270 days but some issues go out for as long as one year. o Returns on agency securities have compressed relative to historical levels. However, a relatively small allocation in this asset class is a prudent method of enhancing the overall credit quality of a portfolio. • Money Market Funds: Mutual funds that invest in highly rated short-term debt instruments. Because they provide the benefit of pooled investments, investors can participate in a more diverse and high-quality portfolio than they otherwise could individually. Money market funds seek to maintain a stable net asset value of $1 per share and pay a dividend. Money market funds that are registered with the SEC are required to comply with Rule 2a-7 under the Investment Company Act 1940. Rule 2a-7 includes diversity, maturity and credit rating restrictions on money market fund investments. The U.S. Treasury announced an extension for the Temporary Guarantee Program until September 18, 2009. This program provides coverage to shareholders for amounts that they held in participating money market funds as of the close of business of September 19, 2008. Several major fund providers have decided that they will not extend the participation for their Treasury and agency money market funds. • Municipal Notes: Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. • Repurchase Agreements: Short-term loans – normally for less than two weeks and frequently for one day – arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. o Bulk of repo financing is done on an overnight basis called overnight repo. o Many purchasers of repos ask for an over-collateralization of the transaction that equates to 102 or 103 percent of the face value of the securities that are on loan. o Repos are viewed as safer investments because of the direct and often over-collateralized lending link. o Used properly, repo offers investors the opportunity to keep surplus working capital cash invested with minimal liquidity, credit, or price risk. • Treasury Bills: Short-term debt obligations of the U.S. government; mature in one year or less. They are sold at a discount of the par value to create a positive yield to maturity. The U.S. Treasury market is the largest and most liquid securities market in the world. o Excellent for clients with minimal tolerance for credit risk. 185 Berry Street Suite 3000 San Francisco, California 94107 U.S.A. SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley PHONE 866.719.9117 svb.com Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value. 0609-0186 © 2009 SVB Asset Management.SM All rights reserved. Rev. 06.2009
  • 3. SVB Asset Management Money Market Instruments OTHER INSTRUMENTS HELD IN SHORT-DURATION ACCOUNTS • Corporate Bonds: Debt obligations issued by private and public corporations. An investor essentially is lending money to the issuing corporation to finance activities of the issuer. Principal is returned to investors at maturity, with interest paid on specific or periodic dates. o Credit spectrum ranges from investment grade to high-yield “junk” status. Nationally Recognized Statistical Rating Organizations (NRSRO) and non-NRSROs provide credit analysis to assist potential investors in assessing corporate bonds. o Wide selection of bonds is available with varying maturity, credit profile, industry sector, and income streams. The Staple of a Corporate Cash Portfolio: Corporate Bonds o A substantial yield pickup over comparable Treasury investments. o Does require ongoing credit and event risk evaluation, but the additional returns warrant the added analysis. o The longer the maturity of a corporate bond, the greater the marginal yield relative to comparable Treasuries. • Asset-Backed Securities (ABS): Short-term investments that contain stable or established cash flows that are backed by the payment streams from a variety of loans, leases, or credit card receivables. o Majority of asset-backed issues are AAA or AA-rated due to the strong quality of the underlying collateral, the integrity of the payment structure, and the amount of additional credit support. o Provide a greater diversification than mortgage-backed securities due to the smaller loan balances and the greater number of consumer receivables. o Short average life. o Typically high credit quality. o Substantial yield enhancement above U.S. Treasuries of equivalent maturity. o Excellent credit enhancements to overall portfolio as 85 percent of ABS are AAA-rated. o Additional 5-10 basis point pickup relative to bullet financial corporate bonds: As of 12/31/08, AAA rated ABS were trading in line with A-rated financial bonds. o A 10-15-percent allocation in this asset class can marginally increase overall yield to a portfolio and help to minimize event risk. Conclusion No one single asset class can completely achieve the primary investment objectives of a corporation with the following goals in mind: 1) preservation of capital, 2) liquidity provision, and 3) return in excess of a chosen benchmark. A well-diversified portfolio with a broad mix of investments will reduce credit risk, provide required liquidity, and maximize market opportunities. 185 Berry Street Suite 3000 San Francisco, California 94107 U.S.A. SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley PHONE 866.719.9117 svb.com Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value. 0609-0186 © 2009 SVB Asset Management.SM All rights reserved. Rev. 06.2009
  • 4. SVB Asset Management Money Market Instruments Outstanding Bond Market Debt As of December 31, 2008 Federal Agency Treasury(1) $3.2 T $5.9 T Municipal $2.7 T Corporate $6.2 T Mortgage- Related $8.9 T Money Market Asset-Backed $3.8 T $2.6 T Source: Securities Industry and Financial Markets Association This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction. 185 Berry Street Suite 3000 San Francisco, California 94107 U.S.A. SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley PHONE 866.719.9117 svb.com Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value. 0609-0186 © 2009 SVB Asset Management.SM All rights reserved. Rev. 06.2009