Article Solutions for Cities By Taylor Budrow, CFA

Do you know your investments? Why proactive credit research matters

Taylor Budrow, CFA is a senior credit analyst for Public Trust Advisors, LLC. He can be reached online.


The main role of the Public Trust Advisors Credit Team is to help California CLASS evaluate the credit profile of investable entities and determine their suitability as counterparties. But what does that mean for cities reviewing their investment options?

Simply put, the credit team proactively protects investments from a range of global market risks. The credit team is in a pitched, unending battle to stay one step ahead of potential market reactions and credit rating downgrades.

For example: During times of credit deterioration, the credit team aims to ensure that they are not caught running for the exits with the rest of the market. This is important because if a rating agency downgrades a rating agency issuer, the value of the security can drop and potentially lead to losses for the investor. 

This means credit analysts must be well-versed in recent company-specific information; understand ever-changing, global macroeconomic and regulatory environments; and form independent opinions that are not always in line with the prevailing market consensus. Here’s how we strive to keep your investments safe.

Why should this matter to your city?

Although an investment may hold a coveted ‘AAA’ rating from a nationally recognized statistical rating organization, there may be much more happening behind the scenes than what is first perceived. Before investing, cities may want to consider both the rating of the investment and the overall creditworthiness of the entire portfolio of securities. While the California Code governing the permitted investments for municipalities is generally high quality and safe, the “prudent investor standard” requires thorough due diligence before investing.

To provide better insight into the credit team’s processes, let’s look at a recent example: Credit Suisse. The bank’s downfall was one of the biggest news stories of early 2023, with financial analysts and journalists spending several months expounding on its persistent operational pressures and speculating about its future. Those speculations were put to rest in late March when the bank was formally sold to a competing Swiss bank, and its existence as an independent financial institution ended.

To better understand the Credit Suisse story from a credit perspective, it is necessary to look back even further. For much of 2021, concerning reports from Credit Suisse became more frequent as the bank was dealing with potential losses and ongoing lawsuits. However, these reports were projections. At the time, the bank was still supported by a strong capital position, as well as recent positive operating performance.

As a result, the Public Trust Advisors Credit Team kept limits already in place on the purchase of Credit Suisse investments. The credit team maintains several tools to reflect their opinion about the creditworthiness of an entity. This includes (a) the ability to limit either the allowable exposure to a certain company as a percentage of total holdings or (b) to limit the allowable duration of money market instruments purchased from that entity by Public Trust.

In October 2021, the credit team lowered the allowable duration of Credit Suisse money market instruments from any permitted instruments to only those maturing within 180 days. The credit team placed these tighter restrictions in response to questions about the bank’s risk management and internal controls. Credit restrictions were not stricter given the bank’s maintenance of strong capital and asset quality.

Over the next several months, the credit team imposed further restrictions on Credit Suisse in response to its CEO departing, management turnover, mounting concerns around risk management practices, and in anticipation of a potential negative rating action at one of the credit rating agencies. By February 2022, limitations were at the strictest level. Just a few months later in May 2022, the credit rating agencies reduced the bank’s rating to reflect the deteriorating Credit Suisse credit profile.

The ability to parse through the “noise” in the market to determine what is relevant and accurate is among the primary skills of a credit research analyst. The credit team saw the difference between thin ice and solid footing and decided there was no longer any level of investment in Credit Suisse that could be held safely. They removed Credit Suisse from their approved list in July 2022 to avoid any exposure to a deteriorating issuer. Over the next several months, credit rating agencies downgraded Credit Suisse to levels outside the permissible investment parameters for short-term investment pools.

Not every credit story is the same, but Credit Suisse serves as the most recent example of what a credit team’s purpose is and how proactive decision-making can assist clients.* The Public Trust Credit Team does not work in isolation, but rather in conjunction with its portfolio management and operating teams to prioritize the protection of client capital.

If your city is considering expanding its investment program that utilizes professional portfolio management and credit research teams, please connect with us! We can help your city in striving to maximize investment income for your community.

*A version of this article was first published on May 24, 2023. As of May 24, 2023, Credit Suisse served as the most recent example of a removal from The Public Trust Credit Team’s approved list followed by a subsequent Nationally Recognized Statistical Rating Organizations downgrade. On May 4, 2023, The Public Trust Credit Team removed KeyBank NA/Cleveland, OH (“KeyBank”) from its approved list. It was placed on credit watch by S&P and Moody’s on April 21, 2023, and May 15, 2023, respectively, and as of August 21, 2023, KeyBank was downgraded by S&P. All comments and discussions presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.