AgdaPkt 2017-09-25 Closed and Joint SA PFA

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of “A” or better. Consistent with Code, a maximum sector allocation of 30% is recommended. N. Asset-backed Securities Add language from Code Section 53601 paragraph (o) to permit investment in asset- backed securities (ABS). ABS are bonds backed by various types of assets. The most common structures are backed by auto loans or credit card receivables, but can be backed by other obligations as well, such as trade receivables, equipment leases, airplane leases, home equity loans, and student loans. Each pool of assets is usually broken down into individual tranches, with varying coupons and average lives, and can be either fixed rate or floating rate. Originators of the loans or receivables, such as a bank, manufacturer, or finance company, package them into securities in much the same way that mortgages are pooled to form mortgage-backed securities. While most ABS are high quality, like any investment, they are subject to risk. ABS risks include: · Interest rate risk: A change in the level of market rates will affect the value of ABS like any other fixed-income investment. The longer the weighted average life (WAL) of the ABS, the greater its sensitivity to changes in interest rates. · Credit risk: ABS expose the issuer to the quality and performance of the underlying loans or receivables, although that is usually mitigated by the credit enhancements described above. However, if loan performance deteriorates enough, it can burn through the support created by the credit enhancements and cause principal losses. · Prepayment risk: Some ABS may be exposed to the ability of the underlying borrower or lessee to repay or prepay their loan, which could accelerate the return of principal to the investor. While this can be a risk, ABS typically have relatively short maturities, are structured in tranches to minimize the variability of cash flows, and are created from loans that are historically less sensitive to the factors that drive prepayments in MBS. (For example, if interest rates fall, most car owners do not rush out to refinance their car loan.) ABS require careful review of the issue structure, credit enhancement features, and ratings review. Since each issue can be unique, this would be conducted on a deal by deal, and tranche by tranche, basis. PFM would review the historical quality and performance of similar or prior issuance of that issuer. The goal is to analyze and select deal tranches that are well structured, contain quality loans/receivables, have adequate credit support/enhancement, and are from issuers with demonstrated successful experience in sourcing, packaging and managing ABS collateral. All purchases of ABS have gone through PFM’s credit analysis process and have been added to their Approved List. ABS represent an additional investment-grade sector available to high quality investors. ABS can offer the City another way to diversify its holdings and potentially enhance 6.1.B. - Page 5