King County investments take a hit

Standard & Poor's suspended its credit rating of the King County Investment Pool on Friday, four days after S&P severely downgraded a $52 million mortgage-backed investment that is in default.

The pool's financial troubles are the result of a meltdown in the mortgage markets. Until Friday, the county fund had S&P's highest rating, AAAf.

The suspension didn't affect S&P's strong AAA rating of the county's $2 billion in outstanding bonds.

S&P said it suspended the investment-pool rating because of a lack of information about a $53 million holding in the Mainsail II fund, which defaulted on debt payments in August.

Another holding, Victoria Finance, was downgraded Monday to S&P's lowest rating, D, after failing to make scheduled payments this month. The investment pool invested $52 million in Victoria Finance.

Defaults by Mainsail, Victoria Finance and two other troubled securities — Cheyne Finance and Rhinebridge LLC — have tied up more than $202 million, or about 5 percent of the $4.1 billion investment pool, managers said.

The pool invests cash surpluses for the county and about 100 other tax districts, including school, fire, water and sewer districts, and the Public Stadium Authority that oversees Qwest Field. The pool's two largest investors are King County and the Seattle School District.

The "impaired investments," as the county now calls them, are securities known as "structured investment vehicles," or SIVs, that sell short-term debt to fund their investments in mortgages and other loans.

S&P said it suspended rather than withdrew the investment pool's rating because it is likely the rating will be reinstated. But if King County's "distressed" investments don't merit adequate ratings after they are restructured, the investment pool may not qualify for an investment-grade rating, the firm warned.

The pool probably won't recoup any cash from those investments for three to 10 years, said county Finance Director Ken Guy. "Our goal is to not sell in a distressed market but to try to recover our principal value and, hopefully, our interest over a reasonable period of time," he said.

Guy said he expects most, if not all, of the encumbered money to be recovered eventually. As a senior creditor, King County is among the investors first in line to receive a share of assets used as security for the investments.

The Ronald Sewer District withdrew from the county fund Jan. 1, becoming the first and only member to do so since the mortgage crisis hit last summer. The Kent School District has given notice that it may pull out Feb. 2.

The investment pool adopted an "impaired-investment policy" last month that requires any withdrawing member to leave in the pool an amount sufficient to cover its share of losses in the event that none of the frozen funds are recovered. Finance managers of the Kent and Bellevue school districts welcomed that policy as a guarantee some jurisdictions won't leave others holding the bag.

Under the worst-case scenario, the Kent district would lose about $1.5 million to $2 million of its $40 million in the county pool, said the district's executive director of finance, John Knutson. "That's a serious-sounding number, but our annual interest earnings overall is between $3.5 million and $4 million, so it's not going to be a catastrophic event for us — certainly a serious one, but manageable."

Since last summer, the investment pool has reduced its holdings SIVs from about $1 billion to $232 million.

Keith Ervin: 206-464-2105 or kervin@seattletimes.com