Ratings agency Standard & Poor's released a statement yesterday entitled, "Implementation Of The Revised Principal Stability Fund Ratings Criteria Has No Immediate Ratings Impact," which says, "Standard & Poor's Ratings Services said that it is not taking any rating actions today on the 487 global principal stability funds that it rates following the implementation of its revised criteria. Standard & Poor's refined its principal stability fund ratings (PSFR) criteria in June to better account for the risks in funds seeking to maintain principal stability. The criteria apply to principal stability fund ratings on funds globally, excluding Australia and New Zealand. Some of the criteria updates included: Enhancement of our qualitative review of management that includes measures to provide ratings differentiation based on management's resources, operational policies, risk management, and credit analysis; Establishment of explicit issuer ratings for counterparty transactions such as repurchase agreements; Refinement of maximum exposure per issuer; Adoption of weighted average maturity (WAM) to final, or WAM(F) criteria; Introduction of monthly stress-testing guidelines; Refinement of the treatment of municipal securities that we do not rate; Establishment of cure periods for when a quantitative criteria metric/threshold is breached; and, Elimination of the 'G' rating modifier."
S&P's update continues, "To be consistent with the revised criteria, some managers of our rated funds have altered their holdings and, in some cases, improved their resources, operational policies, risk management, or credit analyses during the five-month implementation period between June 8 and Nov. 1. The only rating actions that we took as a result of our revised PSFR criteria were on the 13 funds that we had rated 'AAAm-G'. We changed our ratings on these funds to 'AAAm' because we removed the 'G' from the PSFRs to avoid the potential for misinterpretation of what the 'G' signifies (i.e., strength within a particular rating category). The 'm-G' ratings were assigned when the portfolio consisted primarily of direct U.S. government securities."
Primary Credit Analysts Peter Rizzo and Joel Friedman explain, "When we published the final criteria in June, we said we believed that the criteria would have a limited impact on outstanding ratings, except in the cases of principal stability funds transacting with unrated counterparty exposures. The revised criteria state that the credit quality of the counterparty determines the credit quality of a repo (or repurchase agreement) because the timing and ownership of collateral is uncertain. Counterparty exposures that do not have an explicit issuer or counterparty credit rating of 'A-1' or 'A-1+' from Standard & Poor's or do not have a guarantee of their obligations from a Standard & Poor's-rated entity are "higher-risk investments." At the time we published the criteria, many of the counterparties that rated funds engaged with for repo were not explicitly rated. Since then, most of the counterparties have obtained 'A-1' or 'A-1+' ratings and, therefore, meet the minimum credit quality criteria for all investment-grade PSFRs."
They add, "Principal stability funds continue to be managed more conservatively than they had been in the past because of stricter regulatory standards, a prolonged period of low interest rates, and the ongoing uncertainty in global fixed-income markets stemming from the European sovereign debt problems and their impact on the wider financial markets. Specifically, we have seen that our rated principal stability funds are maintaining increased liquidity positions (through overnight deposits and collateralized repos), shorter overall average portfolio maturities, and greater issuer diversification. A PSFR, commonly referred to as a money market fund rating, is a forward-looking opinion about a fixed-income fund's ability to maintain principal value (that is, a stable net asset value). PSFRs have an "m" suffix (for example, 'AAAm') to distinguish them from Standard & Poor's issue or issuer credit ratings."
S&P also published a paper entitled, "The Process For Assigning And Monitoring Principal Stability Fund Ratings," which says, "In an effort to provide transparency to the ratings process for principal stability fund ratings (PSFRs), Standard & Poor's Ratings Services is clarifying the steps it takes to assign and monitor PSFRs as well as highlighting the definitions it uses in its criteria.... Since 1984, we have assigned principal stability fund ratings, fund credit quality ratings, and fund volatility ratings on fixed-income funds globally, including mutual funds, money market funds, enhanced cash funds, preferred trusts, government investment pools, separate accounts, exchange-traded funds, hedge funds, and unit investment trusts. The goal of our analysis is to understand the sources of risk in a managed fund's portfolio and investment strategy and to assess how these risks affect the fund's ability to meet its objectives. In our view, funds that seek to maintain a stable net asset value (NAV) and a PSFR should be managed conservatively with regard to average maturity, credit quality, and liquidity and should follow well-defined guidelines and investment policies.... Lower investment-grade rating categories ('AAm' to 'BBBm') reflect our view that a fund's strategy incorporates a slightly higher degree of risk."
