Standard & Poor's published two reports involving money market mutual funds yesterday produced by Analyst Peter Rizzo. The first, "Credit FAQ: How Are Events In The Financial Markets Affecting Money Market Funds?," addresses questions over fund support actions, "breaking the buck", the new Treasury guarantee plan, recent ratings actions, and offshore AAA-rated funds. The second, "Money Market Funds Tackle 'Exuberant Irrationality'," discusses asset flows, mark-to-market issues, and recent U.S. Government support actions. Click here to see all of S&P's recent money fund news.
S&P writes, "In light of recent actions taken by some money market funds to freeze redemptions and implement payments in kind in lieu of cash distributions--and some funds' failure to maintain a stable $1.00 per share net asset value (NAV; "break the buck"), Standard & Poor's Rating Services has taken several rating actions on money market funds during the past two weeks. Questions remain as to fund managers' reaction to the current market crisis, as well as future repercussions for investors globally."
On support and defensive actions by funds, the NRSRO says, "During the past year, several financial institutions that sponsor money market funds have done one or more of the following: purchase distressed assets at amortized cost, obtain or provide credit support agreements from highly rated institutions (i.e. A-1 or better), make cash infusions into the fund, suspend redemptions, or distribute redemptions-in-kind.... The recent events included a dramatic increase in shareholder redemption requests at many money market funds. As a result, many managers have taken at least one of the following defensive steps to weather the current storm: continued to closely monitor and reevaluate investments in commercial paper; decreased weighted average maturity (WAM) of their funds by investing in short-term, overnight paper as securities mature; increased their funds' allocations to government-guaranteed instruments; increased diversification among sectors and issuers; or increased communication to shareholders."
S&P asks, "Are other 'AAAm' rated money funds in jeopardy of breaking the buck??" They answer, "Although some funds are currently under market pressure, all rated money market funds are within 'AAAm' parameters. The only funds currently on CreditWatch are the Reserve funds listed below." Regarding the Treasury Guarantee Plan and Federal Reserve Board's Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, S&P says, "We believe the U.S. Treasury's plan to provide a guaranty program for money market funds will help restore investor confidence and liquidity. For money market funds (taxable and nontaxable) that sign up for the program by Oct. 8, 2008, the Treasury Temporary Guarantee Program for Money Market Funds will protect the shares of all money market fund investors as of Sept. 19, 2008. We will review each rated money market fund that signs up for the program on a case-by-case basis to determine if the amount of support provided by the U.S. Treasury is sufficient to protect against fund rating actions due to deteriorating market conditions."
"We also believe the Federal Reserve Board's creation of the Asset-Backed Commercial Paper (ABCP) Money Market Mutual Fund Liquidity Facility (AMLF) will help improve liquidity and pricing for ABCP held in money market funds <b:>`_. The Federal Reserve Bank of Boston (FRBB) administers the AMLF. Because advances under the program are nonrecourse to the FRBB once an eligible borrower has borrowed under this facility, it is at no risk of loss on the eligible ABCP unless the ABCP is deemed to be nonconforming. We believe that rated money market funds that use this structure will have a greater liquidity cushion and will be more able to meet increased redemptions by selling their ABCP exposures at amortized cost," says S&P.
Finally, S&P says 'AAAm' rated European and Offshore money market funds are not guaranteed. "Unlike U.S. domestic 2a-7 money market funds, European and offshore funds will not benefit from the U.S. Treasury's guarantee program. Nevertheless, portfolios of 'AAAm' rated European and offshore money market funds adhere to extremely strict investment guidelines in terms of credit quality, interest rate risk exposure, diversification, and liquidity of instruments. Although investments in these funds are not guaranteed, the funds' investment philosophy and portfolio structure allow them to exhibit extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit, market, and liquidity risks.... There have been only a very few occasions where fund managers have been required to sell securities to meet client redemptions. To date, there have not been any rating actions on any of the more than 120 European and offshore managed 'AAAm' rated funds as a result of the recent market turmoil."
