Investment Services
Dietmar Huesch
Vice President, Treasury & Funding
Certificates: The Lost Step-Child?
Corporate certificates can play a valuable role within a credit union’s investment portfolio, yet many credit unions avoid these instruments. Given the multiple advantages certificates offer, I often wonder why? While certificates are not as sexy as securities, the simplicity and yield advantage are the very reason why they should be included within your portfolio. Let’s look at what I see as the advantages over like securities:
Yield Advantage: Most certificates offer a yield advantage versus similar securities. For example, our two-year certificate is yielding 27 basis points more than an agency bullet security. On a $10 million investment, that is $27,000 per annum addition income. I am sure you could hire a teller or two from the proceeds.
Availability: Securities are not always available in the form that you need. Certificates are always available in any size with a maturity option. Most certificates issued are of the fixed-rate variety. However, other types of certificates such as floating-rate, callables, and index amortizing certificates are all available and can be structured in any size to meet your needs. Also putable and floored certificates, a valuable ALM tool, are available.
Operationally Simple: Certificates are simple to book, and include multiple options. Proceeds can move easily from and to your market daily account.
Ideal for Ladders: The fixed-rate maturity ladder, an important component of your investment portfolio, is designed to protect your credit union from declining rates as well providing your credit union with a steady flow of liquidity if needed. The availability of certificates to any maturity date makes them an ideal investment for your maturity ladder.
Liquid: One of the knocks on certificates is that they are not liquid. This is simply untrue. Certificates can be redeemed at any point. The redemption penalty would be a market based penalty, the same kind you would have with a security. If a certificate is in money from market standpoint, you will be paid that gain. Of course, on the flip side, if your certificate is under water, you would have to pay a penalty. How liquid are your securities? Have you tried to sell something lately? If you can find a bid, you find that pricing is all over the place?
Accounting Advantage: Certificates are non FAS 115 eligible, which means they stay on your books at par for the life of the investment. No mark-to-market issues to deal with.
Regulator Scrutiny: Regulators are comfortable with corporate certificates. They understand them and generally have little or no issues with credit unions investing in them. In fact, regulations allow credit unions to have 100 percent of their investment portfolio invested in certificates.
Certificates are obligations of the issuing entity. If you buy a WesCorp certificate, this would be an obligation of WesCorp. Doesn’t that sound comforting to know that WesCorp has $2 billion in capital to stand behind your certificates?
For more information, call a WesCorp account executive today at (800) 442-4366, ext. 6307.
As Vice President, Treasury & Funding, Dee Huesch is responsible for the pricing and development of WesCorp’s share accounts, structured investments, credit products, and loan products. You can e-mail him here.