Florida Holds $2.2 Billion of Debt Cut to Junk

The Florida agency that manages about $50 billion of short-term investments for the state, school districts and local governments holds $2.2 billion of debt cut to junk status.

The downgrades affect more than 4 percent of what the Florida State Board of Administration has purchased for the funds, according to a report by the agency's director, Coleman Stipanovich, that will be delivered at a Cabinet meeting of Republican Governor Charlie Crist today. Some $3.6 billion, or 7.3 percent, of the securities may be downgraded by credit- rating companies, according to the document, provided to Bloomberg by the state board.

Florida rules require the state's short-term investments to only be top-rated, liquid securities, so taxpayer funds aren't placed at risk. The data from Florida shows how far the effects of the bursting of the housing bubble are being felt as complex investment vehicles once marketed as high-yielding safe havens are now backed by collateral shunned by investors.

``Investment of public money needs to be carefully conducted and thoroughly researched,'' said Harvey Pitt, former chairman of the U.S. Securities and Exchange Commission. ``This is not the place for seat-of-the-pants judgments. It requires a lot more than jumping on the latest investment du jour to improve your results.''

Florida isn't the only government whose short-term investments have been affected by rising mortgage defaults in the U.S. and investors' diminished appetite for the securities tied to them.

King County Woes

Last month, Fitch Ratings said Washington state's King County, which includes the city of Seattle, may have its rating lowered on $1.5 billion of bonds because of its investments in debt being roiled by rising defaults on U.S. home mortgages.

Florida's state funds were affected by bad investments in asset-backed commercial paper, short-term debt sold by financial institutions that is secured by collateral such as mortgage securities and credit-card receivables. As the value of that collateral dropped, investors were unwilling to reinvest their money when the short-term debt matured, creating a liquidity crisis for the financial institutions.

Florida's short-term holdings include $400 million of Axon Financial Funding LLC debt, which was cut to junk status by Standard & Poor's on Nov 9. The others rated below investment grade are $850 million of KKR Atlantic Funding Trust, which was cut to default by Fitch last month; $577 million of KKR Pacific Funding Trust debt, cut by Fitch to default last month; and $319 million of debt issued by Ottimo Funding Ltd., cut to default by S&P on Nov. 9.
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