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15 Aug 2008
Moody's downgrades Lehman Brothers Enhanced Libor Fund's market risk rating to MR3 from MR1
Fund's Aaa rating remains unaffected
New York, August 15, 2008 -- Moody's Investors Service has downgraded to MR3 from MR1 the market risk
rating assigned to the short-term bond fund managed by Lehman Brothers
Asset Management LLC, following a review that commenced on May 8,
2008. The market risk rating remains on Watchlist for possible
The downgrade of the fund's market risk rating reflects the relatively
higher level of volatility that the fund's net asset value (NAV)
may continue to experience due to current market conditions and the fund's
exposure to ABS securities, largely Home Equity ABS and CMBS.
"While the fund's credit rating remains Aaa, with 98.9%
of securities rated Aaa, 1.12% rated Aa and 0.4%
rated A, the overall uncertainty associated with fundamental performance
of ABS and CMBS securities continues to negatively impact the volatility
of senior Aaa Home Equity RMBS and CMBS securities, which account
for approximately 60% of fund assets," said Moody's
AVP Rory Callagy. "In addition, rising loss rates in
consumer asset backed securities have resulted in credit spread widening
in consumer ABS, placing additional upward pressures on the volatility
of the fund's NAV." Credit card ABS, Auto ABS
and Student Loan ABS made up close to 25% of portfolio assets as
of June 30th.
The effective duration of the fund has been managed to low levels and
is now just under 3 months. The fund is invested in a diversified
portfolio of high quality securities with short weighted average lives
that generally range from 0.1 to 3.5 years.
The market risk rating remains on Watchlist based on Moody's expectation
that the portfolio's non-prime US residential mortgage backed securities
(RMBS) concentration will likely continue to produce total return and
NAV volatility in excess of levels associated with a rating of MR3,
generally reflecting an annualized standard deviation range of 3.90%
to 6.00% and a semi-deviation range between 1.75%
to 3.25%, due to lack of market liquidity and worsening
fundamental performance in this sector. Conversely, we should
expect the portfolio's market risk to moderate, as the investment
manager continues to pursue its current strategy of reinvesting all pay
downs from non-prime RMBS securities in high quality short average
life securities in ABS sectors other than non-prime US RMBS.
This should be reinforced by the manager's decision back in May
of this year to reallocate approximately 50% of fund assets away
from non-prime US RMBS to Aaa or P-1 securities with shorter
average lives subject to lower price variability. We expect to
focus on and conduct further analysis on the fund's total return and share
price volatility in light of the fund's current strategy.
Moody's fund ratings are opinions of the investment quality of shares
in mutual funds and similar investment vehicles which principally invest
in short-term and long-term fixed income obligations,
respectively. As such, these ratings incorporate Moody's
assessment of a fund's published investment objectives and policies,
the creditworthiness of the assets held by the fund, as well as
the management characteristics of the fund. The ratings are not
intended to consider the prospective performance of a fund with respect
to appreciation, volatility of net asset value, or yield.
Funds rated Aaa are judged to be of an investment quality similar to Aaa-rated
fixed income obligations - that is, they are judged to be
of the best quality.
Moody's also assigns companion market risk ratings. Mutual fund
market risk (MR) ratings are opinions of the relative degree of volatility
of a rated fund's net asset value (NAV). In forming an opinion
of the fund's future price volatility, Moody's analysts consider
risk elements that may have an effect on a fund's net asset value,
such as interest rate risk, prepayment and extension risk,
liquidity and concentration risks, currency risk, derivatives
risk. The ratings are not intended to reflect the prospective performance
of a fund with respect to price appreciation or yield. Market risk
ratings are assigned using a five point scale from MR1 to MR5 (MR1+denotes
a constant net asset value money fund). Funds rated MR3 are judged
to have moderate sensitivity to changing interest rates and other market
Robert M. Callagy
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
Senior Vice President
Structured Finance Group
Moody's Investors Service
No Related Data.
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