Experts from the three leading fund rating services addressed some of the concerns and questions that have been out there about money market fund ratings in a session at last month's Money Fund Symposium. The segment, called "Money Fund Ratings Roundtable," was moderated by Crane Data President Peter Crane and featured panelists Rory Callagy, Senior Analyst at Moody's; Roger Merritt, Managing Director of Fitch Ratings; and Peter Rizzo, Senior Director at Standard & Poor's Ratings. The discussion featured a range of issues, including ratings trends, the impact of regulations, and new criteria. (Note: Subscribers and attendees may access the full conference recordings and Powerpoints via our "Money Fund Symposium 2015 Download Center." Crane Data will also be hosting its next conference event, the 3rd annual European Money Fund Symposium Sept. 17-18 in Dublin.)
Rizzo gave some background and recent trends related to money market funds ratings. Historically the demand for MMF ratings has been driven primarily by institutional investors, who have it in their investment guidelines that money must be put into rated funds, said Rizzo. The number of S&P AAA rated money market funds has dropped in recent years from 777 at the end of 2010 to 735 in June 2015, due mainly to industry consolidation, said Rizzo. The amount of assets in rated funds has stayed essentially flat over the time period with $1.693 trillion at the end of 2010 compared to $1.686 trillion at the end of 2014 and $1.588 trillion in June 2015. The bulk of AAA rated fund assets are institutional with 44% of rated funds in Prime Institutional funds, 43% in Government Institutional. Just 5% is in Government Retail, 5% is in Tax-Free, and 3% is in Prime Retail.
Merritt concurs that the demand for AAA rated funds is investor driven. Case in point, he cited a proposal by the European Commission to abolish ratings for money market funds in Europe. "They have since backtracked on that primarily because they heard from corporate treasurer that they value the ratings, they value the third party independent oversight, and in some cases the additional conservatism that comes along with a rated fund," he commented.
Callagy added that from Moody's perspective, the withdrawal of some ratings recently is partly due to the difficult yield environment. "The ratings that we have are predominantly AAA," he said. "As funds have sought more yield or for one reason or another decided that our methodology and the models that we use are too restrictive and they can't maintain the AAA rating, they've moved to withdraw the rating rather than try to operate with the same type of strategy but at a lower rating." But Callagy also cited the growing need for ratings in the space outside 2a-7 money market funds. "That world right outside 2a-7 is not standardized and there are a lot of different strategies, so we think that ratings are actually more relevant in that space. Investors in that space could benefit from the rating agencies views on the different risk that managers are taking."
On the subject of money fund reforms, specifically the floating NAV requirement, Rizzo said it won't change the approach that S&P takes to rating money funds. "We view the floating NAV as a neutral rating factor. We expect to continue to apply our methodology as is. We believe that despite the requirement for some funds to float NAV, fund managers will still likely aim to minimize share price fluctuations. So, we would continue to apply our 0.25% deviation for the AAAm rating," stated Rizzo. Merritt concurred, adding, "We rate constant NAV and variable NAV funds under the same global criteria for money funds. We're focused on the risk attributes of the portfolio in terms of credit market and liquidity risk and not as concerned about the accounting convention."
Callagy discussed the outlook that Moody's gave the MMF industry for 2015. "Every December we put an outlook out on the money market fund industry, and it's what we believe the conditions will be like over the next 12 to 18 months. I think saying that it's negative is probably not too far off. We've heard a lot about the challenges on the supply side, the reform side, and potential change in interest rate policy and how that makes it challenging work for money managers." One positive, he added, has been that Moody's new bank rating methodology has had a positive impact on money market fund credit and stability profiles.
Merritt spoke about the criteria Fitch uses to rate money market funds. "The nice thing about money funds, and why they've been so successful, is they are pretty simple to understand, simple to analyze. You have three pillars -- credit risk, liquidity risk, and market risk. At different points in time, the industry or a particular fund is going to be in a different set of stresses so you may be emphasizing one over the other at any given point in time."
Callagy cited a similar framework, but added, "One of the things that we look at is not just absolute liquidity, but liquidity relative to your top three shareholders. We think that's important because it shows you'll be able to meet those redemptions if they were to redeem. We think that that's a good metric. The other metric or a model that we use that gets a lot of attention is our NAV stress model. The result is very helpful to us because in our opinion it provides a nice relative ranking of the funds exposure and market risk -- as a result of that we can differentiate between funds."
Fitch made its last change in criteria in 2010, just ahead of the first round of SEC reforms, explained Merritt. "Much of what we put in place dovetailed pretty well with what the SEC ultimately was looking for -- mandatory liquidity buckets, a tighter ratings framework in general based on some of the lessons learned from the crisis. For the most part it's remained relatively stable," he said.
Rizzo was asked about S&P AAAm ratings and the prohibition against A-2 counterparties, even with repo collateralized with Treasuries. He explained, "The issue is Tier 2, A-2 exposures in AAAm rated funds. At this point we believe that an A-2 risk or Tier 2 risk is inconsistent with AAAm rated funds. We hold 'AAAm's to a high standard. We understand if the supply of A-1s decreases that poses challenges. We've solicited feedback. We're hearing what the market has said. But at this point that's the risk profile we believe is consistent for the AAAm rated funds. We are evaluating whether collateralized A-2 is something that could be considered for AAA, but at this stage that's the profile."
Crane brought up that JP Morgan recently cancelled ratings for a few of their funds, but he wasn’t aware of any others that have followed suit. "I think it's reflective of the difficult supply environment that managers are really straightjacketed in what they can do," he said. (See also Crane Data's May 20 "News", "JP Morgan Streamlines AAA Ratings on Money Funds; Lux Current Yield.")
