The California Public Employees' Retirement System (CalPERS) has vowed to 'aggressively deploy its capacity' to alleviate current market disruption brought about by the collapse of the auction rate market.
The situation is the result of recent difficulties in the auction rate market, where public finance makes up 50% of the $330bn securities issued.
Auctions for these securities began to fail in February when investors declined to bid because of fears monoline insurers, which backed the debt, were no longer creditworthy, and large investment banks declined to act as bidders of last resort, as they had in the past.
This meant issuers were forced to pay a high penalty interest rate, which CalPERS said was putting an onerous burden on municipalities in California and beyond.
CalPERS revealed at its investment committee this week that staff have been in contact with credit enhancement banks to partner on Californian transactions and have indicated interest in $200m California auction conversion transactions, with an additional $165m currently in the closing process.
However, CalPERS said while staff had been involved in the conversion of California auction securities into other financing vehicles, it was restricted under Internal Revenue Service (IRS) rules contained in the IRS Code.
It said: "The restriction imposed by the IRS Code impedes our ability to lead transactions and imposes a structural problem for the municipalities that are considering using CalPERS as a credit or liquidity provider in the auction rate conversion process.
"Despite the IRS limitation, staff is actively engaged in researching and developing broader strategies to assist municipal issuers in California and nationwide."
Sherry Reser, media relations manager at the California State Teachers' Retirement System (CalSTRS), said the pension fund had also seen an unprecedented number of enquiries in this area.
She said she was not able to confirm any pending deals, but added: "CalSTRS is a patient long term investor always looking for opportunities to strengthen the portfolio. The current market conditions have created pockets of opportunities and we're evaluating those to ensure they meet our stringent due diligence for risk and return."
Kris Wulteputte, managing director, DEPFA Bank, said the disappearance of the auction rate market could provide opportunities for big pension funds such as CalPERS. He said: "It is very unusual for a pension fund to offer this sort of service, but at the moment it needs big institutions with a strong capital base and significant liquidity.
"The standard financial institutions have all been very badly hit by the recent credit crisis, while pension funds have not been hit as much.
"The long term investors are fairly naturally situated to get into this space, although it is fairly uncommon for a pension fund."
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