"While money market funds have weathered rapidly escalating redemption increases fairly well, these events raise questions as to whether long-term changes are coming for money market funds, and more specifically, the way money fund portfolios are managed to ensure same-day liquidity and stable NAV," says Fitch Ratings in an update released yesterday.
The ratings agency says, "Money market funds - primarily 'prime' funds - have faced unprecedented redemption activity over the last two weeks primarily due to the default of Lehman Brothers Holdings, Inc., the net asset value (NAV) impairment of the Reserve Primary Fund (which had significant Lehman exposure) and the temporary closure of Putnam Prime Money Market Fund (Institutional). Fitch has been in close contact with Fitch-rated fund sponsors during this market upheaval, requesting daily updates of portfolio composition and redemption activity, with particular focus on prime and off-shore U.S. dollar funds."
Fitch explains, "Redemption activity among Fitch-rated funds has been driven largely by reduced investor confidence, as opposed to observable credit deterioration, with 'AAA/V1+' rated funds maintaining high credit quality. However, market-based liquidity for many fund assets proved to be unreliable in the current stress. While redemption activity has stabilized following recent actions by the Federal Reserve and U.S. Treasury, certain prime funds experienced exceptionally high cash outflows during the last two weeks reflecting fund-specific concerns or the effects of the approaching quarter-end. Redemption activity was high for a number of prime and U.S. dollar off-shore funds, while other rated funds, particularly government funds experienced positive net cash flow, evidencing a pronounced flight to quality."
"To date, most prime money market funds have been able to meet redemptions through holdings of cash and short-term assets. In a few instances, support from a well-capitalized parent/sponsor has been an additional source of support. That said, the unusually high redemption activity has put pressure on the remaining liquidity resources of some funds and led to an extension of the funds weighted average maturity (WAM) - one measure of liquidity. A limited number of funds saw WAM extend to beyond 60 days, which typically is the outer WAM band for AAA/V1+ rated funds. However, in these instances the combination of supportive actions from fund sponsors and the U.S. Treasury mitigated liquidity concerns," says the release.
Finally, "Fitch views the actions taken by fund sponsors to preserve liquidity and support fund NAV as reasonable in response to unprecedented challenges. In the case of Putnam Prime Money Market Fund (Institutional) and other funds not rated by Fitch, these actions included closure of the fund given the magnitude of redemption requests. While not consistent with money funds' stated redemption policy of same day liquidity, Fitch recognizes that such suspensions allow for a more orderly liquidation of fund assets, and ensure equitable distribution of proceeds."
