gioa conference 2012 moody’s approach to rating government investment pools: cnav and bond funds...
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GIOA Conference 2012Moody’s Approach to Rating Government Investment Pools: CNAV and Bond Funds
Marty Duffy
VP-Managed Investments Group
March 21, 2012Local Government Investment Pool Ratings
Money Market Mutual Funds
Moody’s Rated LGIPs• Illinois Metropolitan Investment Fund
(IMET)1-3 year fund
• JP Morgan Michigan Governmental Money Market Fund
• Puerto Rico Government Investment Trust Fund
• Riverside Pooled Fund Investment Portfolio
• San Bernardino County Investment Pool
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Money Market Mutual Funds
Local Government Pools are ChallengedPool structure and purpose are key to assessing risk profile
Assets Credit conditions may degrade asset quality Geo-political and regulatory conditions impact market
techicals, summer “flight to quality” Concentration Tension between quest for yield and interest rate
environment Asset allocation and duration positioning
“Liabilities” Shareholder base and seasonality of redemptions and
subscriptions Forecasting cashflows can be challenging when the
municipal economic base comes under stress
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Money Market Mutual Funds
Bond fund methodology and symbols Updated approach effective March 30, 2012
New rating symbols and definitions to distinguish bond fund ratings from long-term debt ratings
Credit quality of fund’s underlying assets To use portfolio weighted average life (WAL) as
duration benchmark for measuring portfolio’s expected credit loss profile. (Previous benchmark selection a function of fund’s “stated objectives”)
Qualitative considerations may affect rating in exceptional cases, such as severe weakness of fund manager or sponsor or material and persistent deviation from the fund’s strategy
Liquidity, operational, interest rate, currency and other market risks specifically excluded from the rating
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Money Market Mutual Funds 5
Date: June 20, 2011 Moody's Fund Credit Matrix - Example Portfolio Rating Matrix (Table 2)Fund: [Fund Number]
Securities Enter Par Amount InvestedPrime - 1 Prime - 2 Prime - 3 Not-Prime
No. Days Dates Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Total % Rank1. 1 - 15 20-Jun - 5-Jul-11 3,185,565 1,650,775 1,300,000 $6,136,340 10.7% 2
2. 16 - 30 06-Jul - 20-Jul-11 1,300,000 1,300,000 $2,600,000 4.5% 10
3. 31 - 45 21-Jul - 4-Aug-11 2,700,000 $2,700,000 4.7% 9
4. 46 - 60 05-Aug - 19-Aug-11 1,400,000 1,400,000 $2,800,000 4.9% 8
5. 61 - 75 20-Aug - 3-Sep-11 1,400,000 4,900,000 $6,300,000 11.0% 1
9. 121 - 135 19-Oct - 2-Nov -11 3,000,000 $3,000,000 5.2% 6
16. 226 - 240 01-Feb - 15-Feb-12 1,500,000 $1,500,000 2.6% 17
21. 301 - 315 16-Apr - 30-Apr-12 3,000,000 $3,000,000 5.2% 6
22. 316 - 330 01-May - 15-May -12 5,000,000 $5,000,000 8.7% 3
24. 346 - 360 31-May - 14-Jun-12 2,600,000 2,000,000 $4,600,000 8.0% 4 1 y ear
34. 576 - 606 16-Jan - 15-Feb-13 1,000,000 $1,000,000 1.7% 18
51. 1103 - 1133 27-Jun - 27-Jul-14 250,000 $250,000 0.4% 22
52. 1134 - 1164 28-Jul - 27-Aug-14 3,500,000 $3,500,000 6.1% 5
53. 1165 - 1195 28-Aug - 27-Sep-14 2,000,000 $2,000,000 3.5% 13 39 mo
54. 1196 - 1226 28-Sep - 28-Oct-14 2,000,000 $2,000,000 3.5% 13
57. 1289 - 1319 30-Dec - 29-Jan-15 600,000 $600,000 1.0% 20
60. 1382 - 1412 02-Apr - 2-May -15 250,000 $250,000 0.4% 22
64. 1506 - 1536 04-Aug - 3-Sep-15 2,500,000 $2,500,000 4.4% 11
65. 1537 - 1567 04-Sep - 4-Oct-15 1,000,000 $1,000,000 1.7% 18 51 mo
68. 1630 - 1660 06-Dec - 5-Jan-16 500,000 $500,000 0.9% 21 54 mo
72. 1754 - 1784 08-Apr - 8-May -16 2,000,000 $2,000,000 3.5% 13
74. 1816 - 1846 09-Jun - 9-Jul-16 1,800,000 $1,800,000 3.1% 16 5 y ears
75. 1847 - 2211 10-Jul - 9-Jul-17 1,968,750 250,000 $2,218,750 3.9% 12 6 y ears
Total $6,685,565 $2,000,000 $7,200,775 $7,100,000 $13,050,000 $1,500,000 $10,868,750 $1,250,000 $2,600,000 $5,000,000 $57,255,090 100%% 11.7% 3.5% 12.6% 12.4% 22.8% 2.6% 19.0% 2.2% 4.5% 8.7% 100%
Rank 5 8 3 4 1 9 2 10 7 6
Credit Rating AnalysisBaa
Meets Benchmark (Yes/No) Yes Percentage of securities in each rating bucket Percentage of securities in each maturity bucket% of Allowable Expected-Loss 86.2%
Rating Benchmark (WAL)
Allowable EL at the suggested rating level (Baa)
Maturity
2 years
Money Market Mutual Funds
Bond fund (bf) rating definitions
Rating Definition
Aaa-bf Bond Funds rated Aaa-bf generally hold assets judged to be of the highest credit quality
Aa-bf Bond Funds rated Aa-bf generally hold assets judged to be of high credit quality.
A-bf Bond Funds rated A-bf generally hold assets considered upper-medium credit grade
Baa-bf Bond Funds rated Baa-bf generally hold assets considered medium credit grade
Ba-bf Bond Funds rated Ba-bf generally hold assets judged to have speculative elements
B-bf Bond Funds rated B-bf generally hold assets considered to be speculative
Caa-bf Bond Funds rated Caa-bf generally hold assets judged to be of poor standing
Ca-bf Bond Funds rated Ca-bf generally hold assets that are highly speculative and that are likely in, or very near, default, with some prospect of recovery of principal and interest
C-bf Bond Funds rated C-bf generally hold assets that are in default, with little prospect for recovery of principal or interest
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Money Market Mutual Funds
Money Market Funds: Revised methodology and framework
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Portfolio Credit Profile
Aaa Aa A Baa Ba
Port
folio
St
abili
ty P
rofil
e
1 Aaa-mf Aaa-mf Aa-mf A-mf Baa-mf
2 Aaa-mf Aa-mf A-mf Baa-mf B-mf
3 Aa-mf A-mf Baa-mf B-mf C-mf
4 A-mf Baa-mf B-mf C-mf C-mf
Money Market Mutual Funds
Money market fund (mf) rating definitions
Rating Definition
Aaa-mf Money market funds rated Aaa-mf have very strong ability to meet the dual objectives of providing liquidity and preserving capital.
Aa-mf Money market funds rated Aa-mf have strong ability to meet the dual objectives of providing liquidity and preserving capital.
A-mf Money market funds rated A-mf have moderate ability to meet the dual objectives of providing liquidity and preserving capital.
Baa-mf Money market funds rated Baa-mf have marginal ability to meet the dual objectives of providing liquidity and preserving capital.
B-mf Money market funds rated B-mf are unable to meet the objective of providing liquidity and have marginal ability to meet the objectives of preserving capital.
C-mf Money market funds rated C-mf are unable to either objective of providing liquidity or preserving capital.
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Money Market Mutual Funds
US money market fund ratings
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Money Market Mutual Funds
Portfolio credit quality
Expected loss approach used to arrive at portfolio average weighted credit quality Probability of default Severity of loss/recoveries
Stratifying short-term ratings on the basis of Moody’s long-term ratings
Model inputs in the event explicit long-term ratings not assigned
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Σ expected losses ≤ 12-month benchmark/Aaa/Aa/A
Money Market Mutual Funds
Portfolio stability profile
Factor Weight
1 2 3 4
Asset profile WAM
Top 3 Obligors
20%<60 days
<15%
<90 days
<30%
<120 days
<50%
>120 days
>50%
Liquidity Overnight liquidity/Largest 3 investors Overnight liquidity/Fund AUM
40%>90%
>20%
>75%
>10%
>25%
>5%
<25%
<5%
Exposure to market risk 40% >0.995 >0.990 >0.985
<0.985
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-----------Score-------------
Money Market Mutual Funds
Other considerations
Sponsor quality Expectation that funds rated in the top rating
category (Aaa-mf) will be sponsored by firms having an investment grade or equivalent credit profile
Manager attributes Credit process, investment process, control
environment, operations and corporate governance
Legal documentation Example: Repurchase agreements
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Money Market Mutual Funds
Repurchase agreementsTraditional Repos•Traditional repos have overnight maturities and are fully collateralized by cash items or U.S. government securities, including individual agency debentures and agency mortgage-backed securities.
•Also included in this category are Aaa-rated sovereign and supranational securities, such as those issued by the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development (EBRD). Traditional repos are eligible for treatment as direct investments in the underlying collateral, both for purposes of diversification and credit quality assessments.
Non-traditional Repos•Collateralized by securities other than cash items or government securities or have maturities greater than overnight. They are eligible for treatment as
•Investments with exposure to the repo counterparty, both for purposes of diversification and credit quality assessments, provided the repos are transacted with primary broker-dealers whose parent companies carry an investment grade rating consistent with a corresponding Prime-1 short-term rating or for which there is an acceptable assessment of creditworthiness
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Additional factors: Collateral types, maturities, levels of overcollateralization that, with limited exceptions, are generally expected to start at 102%, valuation practices, legal documentation and jurisdiction as well as the counterparty’s credit ratings or creditworthiness.
Money Market Mutual Funds
Example : Deriving portfolio stability profile scoresFactor Weig
ht1 2 3 4
Asset profile WAM
Top 3 Obligors
20%46 days
15%
Liquidity Overnight liquidity/Largest 3 investors Overnight liquidity/Fund AUM
40%
30%
35%
Exposure to market riskNAV Stress
40% 0.9955
Overall Fund Stability Profile 100% X(1.2)
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-----------Score-------------
Observation: Combination of Aa1 average weighted credit quality and portfolio stability score of 1 corresponds to Aaa-mf rating, all other things being equal.
Money Market Mutual Funds
Range of scores: Prime funds as of January 31, 2012Quartile WAM
(days)
Obligor Concentration
Overnight Liquidity
NAV Stress
Credit Quality
First Quartile
28 12% 50% 0.9964 Aa1
Second Quartile
39 13% 40% 0.9953 Aa1
Third Quartile
45 15% 31% 0.9938 Aa1
Fourth Quartile
57 20% 21% 0.9917 Aa2
Average 36 14% 42% 0.99507
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Based on data applicable to 44 US prime funds
Money Market Mutual Funds 16
Contact information:
Daniel Serrao
(212) 553-4352
Henry Shilling
(212) 553-1948
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MartyDuffy
(212) 553-1078
Christopher Piron
(212) 553-2768
Money Market Mutual Funds
Related Research: Moodys.comMethodology Updates:
Moody’s Revised Money Market Fund Rating Methodology and Symbols, March 2011 (131303)
Moody’s Revised Bond Fund Rating Methodology and Symbols (138664)
Industry Outlooks:
Money Market Funds 2012 Outlook and 2011 Review (140461)
Bond Funds: 2012 Outlook and 2011 Review, March 2012 (139782)
Announcements and Special Comments
“Money Market Funds Face the Consequences of European Financial Stress,” 7 February 2012.
“Adjusting European Sovereign Ratings to Better Capture Credit Susceptibility to Downside Risks,” 13 February 2012.
“Moody’s Reviews Ratings for European Banks,” February 15, 2012.
“Challenges for Firms with Global Capital Markets Operations: Moody’s Rating Reviews and Rationale,” 15 February 2012.
““Moody’s Places 7 US ABCP Programs and 4 ABCP LOC Programs on Review for Possible Downgrade, “16 February 2012 and “Moody’s reviews for downgrade Prime-1 (sf) ratings of 13 European ABCP programmes,” 16 February 2012.
“Reviews for Downgrade: Long Term Ratings Based Solely on Support from Banks Placed Under Review on February 15,2012,” 21 February 2012.
Pressure Remains On Euro Sovereigns In Absence of Decisive Initiatives, December 2011 (138060)
Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns, November 2011 (137652)
Euro Area Debt Crisis Weakens Bank Credit Profiles, January 2012 (137981)
European Banks: How Moody's Analytic Approach Reflects Evolving Challenges, January 2012 (139207)
Why Global Bank Ratings Are Likely to Decline in 2012, January 2012 (139205)
Money Market Funds Face Consquences of European Financial Stress, February 17, 2012 (139516)
Money Market Funds Continue to Shrink Exposure to European Banks, December 2011 (137105)
Money Market Funds Navigate Risks From Europe’s Credit Concerns, July 2011 (129828)
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Money Market Mutual Funds
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