Fitch: MMF Ratings Unaffected by Hurricane Sandy
Fitch Ratings does not expect U.S. money market funds (MMF) to be materially adversely affected by Hurricane Sandy. Fitch-rated U.S. MMFs collectively manage approximately $460 billion in assets.
Tax-exempt MMFs invest majority of their assets in short-term securities of municipal and tax-exempt issuers, including those located in the East Coast states affected by the storm. These issuers include local governments, educational and healthcare facilities, utilities and transportation systems. In the wake of Hurricane Sandy there have been unprecedented levels of damage to power, subways, commuter rail and telecommunications. However, economic impact of these events to tax-exempt MMFs is expected to be manageable due to limited direct exposure of MMF portfolios to this type of issuers.
Fitch notes that the majority of assets in tax-exempt MMFs feature support from highly rated financial institution. However, approximately $1.0 billion of Fitch-rated tax-exempt MMF portfolios are invested in issuers in the storm affected areas that provide self-liquidity and are not backed by bank letters of credit (LOCs) or a stand-by purchase facility. Securities with self-liquidity are mainly issued by high quality educational and healthcare institutions whose credit fundamentals, in the long-run, are not expected to be challenged by the storm. Fitch observed only minimal exposure to utility companies in the East Coast, such as New Jersey Natural Gas Company, which amounted to slightly over $20 million across all Fitch-rated MMFs.
Furthermore, the great majority of short-term securities in tax-exempt MMF portfolios are issued in a form of variable rate demand notes (VRDNs) that are normally puttable within seven days. As of Sept. 30, 2012, Fitch-rated tax-exempt MMFs allocated 84.6% of their portfolios to such VRDNs.
Given these two important features of tax-exempt assets - support from high-quality banks or other entities and a short-term put option - Fitch does not expect negative rating implications for tax-exempt MMFs due to impact of Hurricane Sandy on municipal and tax-exempt issuers.
Prime MMFs generally invest in high-quality short-term securities issued by U.S. government and its agencies, domestic and foreign financial and non-financial entities and repurchase agreements backed by such securities. Prime MMFs may also invest in securities issued by municipal and tax-exempt entities including VRDNs. As of Sept. 30, 2012, Fitch-rated prime MMFs, on average, had 3.8% of their portfolios invested in VRDNs. Fitch does not expect prime MMF ratings to be materially adversely affected by exposure to VRDNs issued municipal and tax-exempt entities due to mitigating factors as described above for tax-exempt MMFs.
In addition, prime MMFs may invest in commercial paper and short-term notes issued by insurance companies. Fitch expects a number of insurance companies to incur Hurricane Sandy-related losses, including State Farm, Allstate, Liberty Mutual Group, and Travelers, based on market share positions in the Mid-Atlantic and New England regions. As of Sept. 30, 2012, Fitch-rated prime MMF did not have any exposure to property & casualty insurance companies.
Fitch noted a slight increase in demand on prime MMF liquidity in the last week of October, when prime MMFs experienced outflows of $28.1 billion, or close to 2% of the total prime assets, according to the Investment Company Institute. Fitch attributes these outflows to two factors: preemptive draws on MMF balances by institutional investors in the wake of the storm and month-end technical factors. Fitch-rated prime MMFs had substantial liquidity available to meet such outflows. As of Sept. 30, 2012, their daily and weekly liquid assets stood at 29.4% and 42.9% of their portfolios, respectively.
In addition to U.S. MMFs governed by Rule 2a-7 under the Investment Company Act of 1940, as amended, Fitch rates 13 USD-denominated prime MMFs incorporated outside the U.S. in Ireland, Luxemburg and the Cayman Islands, often referred to as offshore MMFs, with total assets under management of over $200 billion. Fitch notes that even through the regulatory regimes for offshore MMFs may vary, these funds are generally managed in line with the investment practices adopted in the U.S. Therefore, Fitch does not expect negative rating implications for USD-denominated offshore prime MMFs for the reason described earlier in this release.
More information on the effects of Hurricane Sandy on the capital markets can be found at www.fitchratings.com
Additional information is available at 'www.fitchratings.com'.
Viktoria Baklanova, Ph.D., CFA, +1 212-908-9162
Fund and Asset Management
One State Street Plaza
New York, NY 10004
Roger Merritt, +1 212-908-0636
Charlotte Quiniou, CFA, +33 1 44 29 92 81
Brian Bertsch, +1 212-908-0549