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19 Mar 2015
New York, March 19, 2015 -- 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.
IMPACT ON MMF RATINGS -- CHANGES TO BANK DEBT RATINGS
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.
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.
IMPACT ON MMF RATINGS -- INTRODUCTION OF COUNTERPARTY RISK (CR) ASSESSMENTS
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.
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.
IMPACT ON MMF RATINGS -- OVERALL
Moody's expects to finalise 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.
IMPACT ON BOND FUND RATINGS
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
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Robert M. Callagy
Vice President - Senior Analyst
Managed Investments Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Marc R. Pinto, CFA
Associate Managing Director
Managed Investments Group
Moody's Expects Outcome of New Banking Methodology to be Positive for Money Fund Ratings; No Change for Bond Fund Ratings
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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