The following excerpts from the article, "S&P's Friedman & Rizzo on Rating Money Funds," featured in the June issue of Money Fund Intelligence. Since the Subprime Liquidity Crisis started almost two years ago, Standard & Poor's Ratings Services' lead money fund analysts Peter Rizzo and Joel Friedman have been front and center, providing information and updates to fund industry participants, investors and the press alike. This month, we feature a Q&A with the pair on ratings, the challenges to money funds, and possible changes in regulations.
Q: What has been the biggest challenge of rating money funds historically? Rizzo and Friedman say, "We saw money fund NAVs have issues in the past when certain structured securities caused pricing pressures, and especially when interest rates rose quickly, like in 1994. That and a few credit events over the past couple of decades have been the biggest challenges until the last couple of years."
Q: What's been the biggest challenge over the past two years? They say, "There have been many. It started in the summer of 2007 with extensions in XABCP programs. It progressed to SIV-lites, SIVs, monoline issues, and then of course to the Lehman bankruptcy in September 2008 and ensuing lack of liquidity in the money markets. This liquidity crunch, caused in part by the downward slide in the credit quality of financial service companies and banks, resulted in pricing and liquidity problems for many highly rated issuers of short term debt. This in turn put negative pressure on the mark-to-market of the asset values for prime money market funds.... However, several Government programs introduced shortly after the Lehman bankruptcy helped stabilize the financial markets."
Q: Why do you call money fund ratings Principal Stability Fund Ratings (PSFRs)? "Standard & Poor's Principal Stability Fund Ratings (PSFR), commonly referred to as a money-market fund ratings, express our opinion of a fund's ability to maintain principal stability and to limit exposure to losses due to credit, market, and/or liquidity risks. The rating categories range from 'AAAm' to 'Dm' where the 'm' is intended to distinguish PSFRs from S&P's traditional ratings, which are usually not subscripted and which indicate a borrower's ability to repay principal and interest on a timely basis.... PSFR definitions address the 'capacity to maintain principal stability' and not timeliness and method of payment."
Q: How do you deal with criteria breeches in AAAm funds? Friedman and Rizzo tell MFI, "The first step of the process it to have our team of dedicated fund rating surveillance analysts review the statistics and holdings reports when we receive a surveillance report. When our review and analysis reveals something outside of our framework, we verify the relevant information for accuracy with the provider of information. Upon verification, our analysts assigned to the fund in question contact the fund management representatives to discuss the details.... We expect highly rated funds to be proactive in dealing with issues as they arise.
Q: What is your outlook for money market funds? They say, "We believe the future for the MMF industry is bright. We expect there to be a continued focus on transparency -- not only from fund sponsors providing more detailed and frequent investment reporting but also an increased focus by fund managers to maintain an active dialog with their larger customers so they can gain an even better assessment of the cash flow needs and expectations of its shareholders."
See the most recent Money Fund Intelligence for the full article, or e-mail Pete Crane or call Crane Data at 1-508-439-4419 to request a copy.
