Moody's Investors Service has issued a new "Special Comment" entitled "Parental Support in Money Market Funds", which indicates that the ratings agency will require complete coverage of impaired assets in the future. The publication says, "Moody's has long considered the ability and willingness of a fund sponsor to provide support to its money market funds to be a key rating factor."
It continues, "Accordingly, prior to a credit event affecting one or more securities held in a money market fund, Moody's assesses both the ability and the willingness of a fund sponsor to support its funds in the event of need, incorporating a range of qualitative and quantitative measures to do so." But, Moody's says, "However, in light of the continued deterioration in the money and capital markets, Moody's has revised some of its views regarding the adequacy of parental support provided by sponsors to their money market funds following a credit event."
Moody's explains, "If a security held by an investment-grade money market fund experiences a credit event, such as a default or rating downgrade, the fund sponsor may need to put in place a mechanism to immunise the fund from the impact of this event and thus maintain the fund's rating. While fund sponsors can achieve this in a number of different ways, two common approaches are: (i) purchasing the security from the fund portfolio at par, or (ii) providing the fund with a letter of credit or guarantee from a highly-rated counterparty (typically rated A2 or above) covering the full par amount of the relevant security. In the latter case, Moody's will review the provisions of the letter of credit or guarantee and compare them with our guidelines to determine the rating impact of such instruments."
The NRSRO explains, "Historical experience has shown the importance of parental support to the achievement of money market fund objectives. Even a well-managed money market fund may experience a drop in mark-to-market NAV as a result of an unexpected credit event or shift in interest rates.... Before the present crisis, there have been many instances when U.S.-domiciled money market funds would have 'broken the buck' or suffered mark-to-market losses of more than 50 bps but for the intervention of their sponsor. In Moody's view, a strong and engaged sponsor is essential to the long-term viability of a money market fund."
The Special Comment says of recent support actions, "When these CSAs [credit support agreements] were put in place, Moody's judged these arrangements to be adequate to preserve fund ratings at investment-grade levels, given our then current assumptions about the likely duration and severity of the credit crisis, the liquidity of fund assets, likely recovery rates of impaired securities and the ability and willingness of fund sponsors to provide additional support if required. However, over the ensuing months the credit crisis has clearly worsened and liquidity remains extremely limited.... As Moody's assumptions about the impact of the crisis on funds have evolved, so has our view of the adequacy of some forms of sponsor support for funds with investment grade ratings." Future credit support will require "suitable credit quality," be "legally binding," and "cover the full par amount of the impaired security" among other criteria.
Finally, Moody's says, "In recent weeks, authorities across the globe have taken steps to improve investor confidence in the financial markets. The U.S. Treasury, for example, has instituted the U.S. Treasury Temporary Guarantee Program, which may reimburse certain shareholders of participating money market funds for losses. In Moody's view, the Program has substantially improved investor confidence in some money market funds, particularly those domiciled in the U.S. However, as the Program is limited in scope and as it takes effect only after a fund experiences a material decline in net asset value or suspends redemptions, Moody's expects its direct impact on money market fund ratings to be limited."
