Moody's Investors Service published a press release entitled, "Update on Money Market Fund Ratings Methodology" yesterday, which indicates that the ratings agency is backing away from its controversial proposals to switch from its AAA money fund rating scale and to heavily weight sponsor support in ratings. The release says, "In September 2010, Moody's Investors Service published a Request for Comment on a proposal to change its global rating methodology for money market funds. A broad range of comments have been received, reflecting feedback from investors, sponsors, consultants, trade groups and regulators on this proposal. With the comment period now over and comments under review, Moody's would like to update the market on its plans for revising the methodology. The proposed revisions to Moody's rating methodology reflected experience gained from the tumultuous period in late 2008 when disruptions in short-term funding markets caused market value declines and record outflows from prime money market funds."
It continues, "Against this backdrop, Moody's proposed to update its money fund methodology and requested market feedback on a number of key changes, including: Ratings determination based on two distinct analytic assessments -- the portfolio credit profile (based on the credit quality of the fund's assets), and portfolio stability profile (including market and liquidity risks); A set of objective measures to be used in a composite evaluation of these two key factors for the purpose of making rating distinctions; Explicitly factoring a sponsor's creditworthiness into the rating, especially for top rated funds, to reflect the extensive history of sponsors' financial and operational support; and Introduction of a new set of rating symbols to reflect the distinct meaning of our money market fund ratings compared to Moody's credit ratings on long-term bonds."
"Moody's has received substantial feedback on our proposal to change the methodology for rating money market funds, via written commentary, through teleconference briefings and phone conversations, and at a number of roundtables we sponsored following the release of our Request for Comment. Among the more prominent themes that emerged from these communications were the following: There was broad support for our proposed expansion and formalization of specific portfolio metrics as the basis for determining ratings, and for the periodic disclosure of those metrics as part of our research in the money market sector. The market supported the identification of differentiating factors among funds," says the release.
Moody's explains, "While some investors told us that their investment governance process could accommodate a new set of rating symbols, many indicated that their current investment guidelines and/or indenture covenants referenced Moody's more traditional rating symbols and that revising those investment guidelines would be extremely difficult, if even possible. While recognizing the rationale for emphasizing the distinction between money fund ratings and long-term credit ratings, many suggested that a modifier added to our current rating symbols -- rather than an entirely new set of symbols -- would adequately distinguish them from credit ratings. We heard from a number of market participants that, by long-established market convention, particular meaning has become attached to -- and portfolio guidelines developed around -- "the highest rating category". Because of this, they noted that our proposal to further segment within the highest rating category by introducing an MF1+ rating could be confusing to investors and disruptive to the market."
They also add, "Some expressed concern over our intention to consider sponsorship as a factor in our money market fund ratings. These respondents argued that despite a long history of sponsor support as a critical factor in preserving money market fund stability, future support is less certain, assessment of sponsors involves judgment, and our considering sponsorship could cause investors to over-rely on sponsors' implicit support for their funds. A number of respondents offered specific comments on the computation of our proposed fund portfolio metrics and/or the calibration of those metrics relative to the component rating factor categories."
The release continues, "Moody's appreciates the attention paid to our proposal for updating our approach to rating money market funds and the time taken by numerous investors and other market participants to share with us their feedback on its specific elements. Having carefully considered market feedback, we intend to publish a final methodology that is consistent with the analytic approach outlined in our Request for Comment, but reflects certain changes to the calibration and representation of the ratings. We believe that this approach will benefit investors by increasing emphasis on market value and liquidity risks while also minimizing market disruption by preserving some key attributes of our existing rating system."
Moody's adds, "The main changes we intend to incorporate into our final methodology are: The top rating category will not be segmented as had been originally proposed. We will represent the ratings using symbols more consistent with our current system and market convention, using a "mf" modifier to highlight the distinct meaning of these managed fund ratings (namely, Aaa-mf, Aa-mf, A-mf, Baa-mf, B-mf, C-mf). This symbol system limits the potential for market disruption while still addressing one requirement of the Dodd-Frank financial reform Act -- to use distinct symbols for ratings with distinct meanings."
They write, "The methodology is re-designed to reflect a fund's own characteristics and thus strong sponsorship will not enhance a fund's rating. At the same time, we expect funds to operate in a stable environment, with minimal incremental risk stemming from their sponsor's own operational, market or funding challenges. In that context, the quality of a fund's sponsor will continue to be a factor in our ratings, including our expectation that funds rated in the top rating category (Aaa-mf) would be sponsored by firms having an investment-grade or equivalent credit profile. However, we anticipate only a modest number of funds to receive lower ratings because of a negative impact from our sponsor assessment. While the rating factors proposed in our Request for Comment will remain intact, we may incorporate minor revisions in the calculation of some of these factors based on feedback received; we are currently reviewing and testing these items."
Finally, it says, "Moody's expects to finalize and release our revised rating methodology for money market funds during the first quarter of 2011. After its release, we will obtain updated information from rated funds and begin to evaluate those funds using the revised approach. Because updating ratings will require both expanded analysis using new information and changes to Moody's systems and databases to accommodate the altered rating symbols, we currently anticipate publishing updated ratings under the new methodology in the second quarter, but will update the market further in the event that our timeline changes."
