S&P: Funds Maintain Stable NAVs
A press release entitled, "So Far, Funds Are Maintaining Stable Net Asset Values Amid Increased Redemptions And Liquidity Pressures" explains, "S&P Global Ratings provides fund ratings on stable and floating NAV money market funds (MMFs), including prime institutional MMFs and local government investment pools (LGIPs) based on our Principal Stability Fund Rating (PSFR) Methodology. An S&P Global Ratings PSFR, also known as a "money market fund rating," is a forward-looking opinion about a fixed-income fund's capacity to maintain stable principal (net asset value [NAV]) and to limit exposure to principal losses due to credit risk." The release continues, "The current market volatility, largely propelled by the global COVID-19 outbreak, has accelerated redemptions from prime institutional MMFs above normal redemption patterns, causing potential liquidity concerns and adding strain to these fund managers' ability to maintain regulatory thresholds. The subsequent impact from MMFs meeting increasing redemption activity and seeking to raise cash by selling assets in a stressed market has led to some NAVs falling 10 basis points (bps) to 15 bps below par. From our surveillance of fund NAVs as of March 20, 2020, these MMFs have maintained NAVs of at least 0.9975, the lowest deviation point for a 'AAAm' rating. If NAVs fall below 0.9985, our criteria then require daily portfolio pricing and stress testing. Furthermore, if NAVs fall below 0.9975, we would likely place the fund ratings on CreditWatch with negative implications, and our criteria would allow a maximum five-business-day cure period to restore the NAV to at least 0.9975. During the cure period, we would take into consideration a fund sponsor's plan to support the pressured NAV." It adds, "S&P Global Ratings recognizes U.S.-domiciled registered 2a-7 fund sponsors and, to a lesser extent, LGIPs, have access to a set of tools that can be deployed to maintain a respective fund's NAV. Examples of these tools include Federal Reserve created backstops, such as the new Money Market Mutual Fund Liquidity Facility (MMLF), as well as parental capital support, credit support agreements, letters of credit, and reserve and escrow accounts. In the case of EU-domiciled MMFs, EU MMF regulations prohibit external support, directly and indirectly, thereby serving to restrict an MMF's available tool usage that would result in guaranteeing the liquidity of the MMF or stabilizing the NAV." Lastly, S&P writes, "While we are aware that some fund sponsors have begun to use these tools to support the NAVs of their fund, our PSFR methodology does not include a fund sponsor's willingness or ability to support the fund's NAV as an explicit rating factor. Rather, a fund's ability to sustain its NAV above the 'AAAm' PSFR NAV minimum deviation of 0.9975 and to limit exposure to principal losses due to credit risk are key factors we monitor. So far, we have not taken any rating actions on PSFRs, and we are closely monitoring development under an enhanced, often daily, surveillance."
