Fitch Ratings has largely completed its review of rated money market funds (MMFs) following the agency’s recent negative rating actions on many of the larger, global banks.
While, these bank ratings actions led certain MMF portfolios to fall outside Fitch’s global MMF rating criteria, particularly with respect to maximum issuer exposure, appropriate corrective adjustments are being implemented by fund managers.
MMF portfolio managers have been adjusting their investment strategies and portfolio holdings subsequent to the recent series of negative bank rating actions by Fitch. As such, rated MMFs portfolios are being brought into alignment with Fitch’s MMF criteria in a reasonably short amount of time, primarily by allowing positions to roll off.
Deviations from Fitch’s ‘AAAmmf’ criteria resulted primarily from funds’ exposures to banks whose short-term ratings were lowered to ‘F1’ from ‘F1+’. Fitch’s ‘AAAmmf’ rating criteria are in fact more restrictive with respect to exposures to ‘F1’ rated institutions, as compared with those rated at ‘F1+’. Specifically, Fitch observed that most of the excessive issuer exposure stemmed from investments with the Royal Bank of Scotland Group plc and Lloyds Banking Group plc that have since then matured or will shortly do so.
Not surprisingly given Fitch’s actions, rated MMFs have seen a rise in their allocation to ‘F1’ rated assets or issuers from an average of 15% at end-September 2011 to 27% at mid-October 2011. Fitch also notes that MMFs remain exposed to further potential negative bank rating actions. For example, several of the banks that are currently held by MMFs have their short-term ratings on Rating Watch Negative (RWN), including Barclays plc, Credit Suisse, Morgan Stanley, Bank of America, Goldman Sachs, and UniCredit S.p.A. Fitch will continue to actively monitor how MMFs adjust their portfolios in response to recent and potential future bank downgrades.