Moody's Investors Service issued a statement yesterday that explains how recent bank rating actions will positively impact its money market fund ratings. The press release, entitled "Moody's Expects Outcome of New Banking Methodology to be Positive for Money Fund Ratings; No Change for Bond Fund Ratings," says "Moody's Investors Service expects recent bank rating actions, together with the intended introduction of Counterparty Risk (CR) assessments for senior bank obligations and counterparty commitments, to drive improvements in credit and stability profiles of rated money market funds (MMFs). On Tuesday 17 March, a large number of bank ratings were placed on review following the publication of Moody's new bank rating methodology. Our preliminary analysis of how potential rating changes may affect MMF portfolios indicate, on average, likely improvement in funds' credit matrix and net asset value (NAV) stress scores, two key metrics in our evaluation of MMFs. Of the 201 rated MMFs, less than 7% are potentially negatively impacted by Moody's bank rating actions based on most recent monitoring reports."
Moody's explains, "Many funds often invest in a variety of bank securities, and any changes in bank security ratings will impact certain of our analytic metrics. The analytic framework for rating MMFs focuses on two distinct factors: portfolio credit profile and portfolio stability profile. To assess the credit profile we evaluate the weighted average credit quality of a fund's portfolio, while for the stability profile we consider other factors that can affect a portfolio's stability including: weighted average maturity, asset concentration, liquidity, investor concentration and exposure to market risk under stress scenarios."
The release adds, "Rating downgrades of securities held in MMF portfolios affect two important elements of our MMF evaluation. Deterioration in portfolio credit quality will result in weaker Moody's Credit Matrix scores, which measures a MMF's maturity-adjusted credit profile, and lower NAV stress model scores, which measures the sensitivity of a portfolio to market risk, including credit spread shift due to assets' credit degradation. Our pro-forma analysis indicates that while exposure to banks that face potential ratings downgrades varies significantly from fund to fund, rated funds' aggregate exposure to the affected banks is small and tenor exposure to the affected banks is short. For MMFs that do show deterioration in key rating metrics, Moody's will gather additional information regarding exposure to the affected credit(s), as well as sponsors' plans for managing those exposures."
Further, "CR assessments were introduced in Moody's rating methodology titled, "Rating Methodology: Banks," published on Monday, 16 March. CR assessments constitute Moody's opinion of the probability of default on senior bank obligations and counterparty commitments other than debt and deposit instruments. Senior bank obligations and counterparty commitments include letters of credit, liquidity facilities, guarantees, swap agreements and other contractual obligations (e.g. repurchase agreements). The position of the CR assessment relative to rated instruments will depend on the presence and the type of operational resolution regime the bank operates in, but in all cases, the CR assessment will be no lower than the bank's Adjusted Baseline Credit Assessment."
Moody's continues, "Following the roll-out of CR assessments globally, we intend to use CR assessments as credit inputs in MMF ratings and specifically in Moody's Credit Matrix and NAV stress models for investments in repurchase agreements (excluding traditional repos), fully-supported asset backed commercial paper, VRDNs, derivatives and other securities supported by bank guaranties. Based on the expected position of CR assessments relative to our current input (rated senior debt), we believe using the CR assessment instead of the bank's senior unsecured rating as the credit input for the aforementioned security types in our credit matrix and NAV stress models will have a positive impact on funds' credit and stability profiles."
They explain, "Moody's expects to finalize its review of bank ratings, and to introduce CR assessments for the large majority of banks, in the first half of 2015. In the event that any deterioration in funds' credit and/or liquidity profile due to downgrades of bank securities is material, and is not offset by improvements due to the introduction of the use of CR assessments in our analysis, we would typically seek to initiate a rating review for any affected funds should fund managers' remediation plan fail to bring their metrics in line with our rating methodology thresholds."
The release concludes, "Moody's does not expect the recent bank rating actions to have a material impact on the weighted average credit quality of Moody's-rated bond funds. Moody's bond fund ratings speak to the credit quality of a bond fund's portfolio, also determined through the use of our Credit Matrix. After considering the possible bank rating actions, there would not be any impact on existing bond fund ratings."
