Federated Investors posted two updates on current events in the money fund market -- one entitled, "European banks and Federated's prime money market funds," and the other named, "Federated's money market funds not affected by Moody's downgrades." The European update, written by Federated's CIO for Taxable Money Markets and Senior Portfolio Manager Deborah Cunningham, says, "As the European sovereign-debt crisis continues to remain in the headlines, it's important to separate actual risk from headline risk. The daily, stringent analysis that is at the root of how Federated operates its money market funds leads us to believe that there's still value in select European senior bank debt since the banks continue to represent minimal credit risk."
Federated also says that their funds were not impacted by Moody's recent bank downgrades. They say, "On Sept. 21, 2011, Moody's downgraded the long-term ratings for two U.S. banks -- Bank of America and Wells Fargo -- and their related bank holding companies -- and also downgraded the short-term ratings one notch for the bank-holding companies of Citigroup and Bank of America. Moody's reiterated that the ratings changes were not a reflection of weakened credit fundamentals at the banks or the bank-holding companies. Instead, Moody's explained that the ratings changes were a reflection of the company's opinion that there is decreased probability that the U.S. government would step in to support a large, systemically important financial institution if such help was needed."
They continue, "While Federated's prime money market funds own securities, primarily collateralized loan agreements, issued by the downgraded bank holding companies, there was no impact to the ratings of Federated's prime money market funds. Additionally, no Federated portfolio was required to make adjustments to its holdings as a result of these downgrades. Federated's experienced investment team continues to view these banks and bank-holding companies as representing minimal credit risk. The banks remain in Federated's approved database as issuers from whom the funds can purchase securities."
She writes, "Finally, it is important to remember that there is an additional level of U.S. regulatory scrutiny that applies to the European securities used in Federated money market funds . All of the European banks approved for use in Federated portfolios are globally diversified with operations in the U.S. Because the senior bank debt from these banks can be issued through their U.S. entities, these banks are subject to U.S. regulatory authority and oversight in addition to the regulatory standards mandated in their home countries. While it doesn't appear that the EU's debt woes will resolve themselves anytime soon, the extensive and daily credit work performed by Federated's portfolio managers and analysts, combined with the oversight of U.S. regulators, underscore our confidence that use of these carefully selected securities from major global European banks should continue to benefit our funds. "
The piece explains, "Federated's team of analysts and portfolio managers makes daily evaluations about each European bank that we own. The approved banks for our prime money market funds include 16 European banks from eight countries, each of which undergoes our stringent credit-analysis process just to make it on the list. We review capital structure, liquidity structure, management structure and other key factors, and are confident that the banks that make the cut are the best capitalized, most diversified, most liquid and highest quality names in the market."
It continues, "On average, 40% to 45% of the assets in most Federated prime funds are in securities from large, essentially global banks that are domiciled in Europe. These holdings have not changed significantly over the last month and offer relative value in the marketplace. Among the French banks, which have been much in the news over the last week or so, we have shortened maturities for new purchases. While Moody's recently downgraded the long-term debt of two French banks -- Societe Generale and Credit Agricole (the latter also remains on credit watch for a potential further downgrade) -- the ratings agency affirmed the banking companies' short-term ratings, which is the segment of the market with which we deal. Moody's also affirmed the short-term rating on BNP Paribas while leaving the long-term debt on credit watch."
Cunningham adds, "The exposure that European banks on our approved list have in the most troubled euro-zone countries is relatively minimal.... We've also determined that a potential default by Greece on its debt would be an earnings event for the banks, not a solvency event. This reflects the fact that the global banks in which Federated invests -- eight of the world's 10 largest banks are domiciled outside the U.S. -- have operations that reach around the world, potentially enhancing their ability to withstand events in any single country."
