After input, the rating agency tweaked its methodology plans for new ratings on money-market mutual funds.
After hearing from a variety of sources, Moody’s is making some changes to its proposed rating scale for money-market mutual funds. Moody’s announcement is a good New Year’s reminder for treasurers with lots of corporate cash managed outside the company to familiarize themselves with some of the changes.
Back in September, Moody’s announced it would make changes to its rating methodology (see related story here) after the tumult in 2008 caused disruptions in short-term funding markets. Those disruptions led to severe market declines as well as record outflows from prime money market funds. This was also the period that the Reserve Primary Fund famously “broke the buck” and suspended redemptions. Following the Reserve Primary Fund, another 30 funds suspended redemptions. Moody’s sought to reflect this in proposing a new global rating scale that could better capture the risks of money market funds as well as a fund’s ability to execute “immediate payment on demand.”
Symbolic change
Moody’s said the comments from interested parties involved several themes, some supportive and some less so. One concern regarded the rating symbols themselves:
Proposal: “Introduction of a new set of rating symbols to reflect the distinct meaning of our money market fund ratings compared to Moody’s credit ratings on long-term bonds.”
This proposal concerned many respondents because for some, “current investment guidelines and/or indenture covenants referenced Moody’s more traditional rating symbols and that revising those investment guidelines would be extremely difficult, if even possible.” Acknowledging the rationale behind distinguishing between credit ratings and MMF ratings, many respondents nonetheless suggested that it would be sufficient to just have a modifier added to Moody’s current rating symbols, instead of a new set of symbols.” Moody’s, in its announced changes to the proposal, acquiesced to this request and will keep its current rating symbols and add mf to them, i.e., Aaa-mf, Aa-mf, A-mf, Baa-mf, B-mf, C-mf, etc.
Another concern regarded more segmenting within the highest rating category:
Proposal: “Money market funds rated MF1+ have excellent ability to meet the objectives of providing liquidity and preserving capital. Money market funds rated MF1 have very good ability to meet the objectives of providing liquidity and preserving capital.”
After the MF1+ and MF1, the next categories Moody’s proposed were MF2, MF3 and MF4. Moody’s said many commenters said that many portfolio guidelines “developed around ‘the highest rating category.’” Therefore, “they noted that our proposal to further segment within the highest rating category by introducing an MF1+ rating could be confusing to investors and disruptive to the market.” Moody’s said that aside from scrapping the new MF symbols, it would not segment the top category.
Sponsor change
Moody’s also said it re-designed its methodology regarding MMF sponsors, and that the strength of a sponsor will not enhance an MMF’s ratings. Nonetheless, “the quality of a fund’s sponsor will continue to be a factor in our ratings.” This includes the expectation that funds rated in the top rating category (Aaa-mf) will be sponsored by firms “having an investment-grade or equivalent credit profile.”
Up and running soon
Moody’s said it will finalize and release its revised rating methodology for MMFs in the first quarter of 2011. It will then begin to evaluate rated funds using the revised approach and publish them beginning in the second quarter.
Moody’s said the commentary it received included written commentary, teleconference briefings and phone conversations, as well as via a number of roundtables it sponsored following the release of its Request for Comment.