Historically Moody’s have used a slightly modified version of their traditional long-term scale (Aaa to C) in rating MMFs, however the nature of MMFs differs from long-term instruments. Whilst MMF investors own shares in the fund, the expectation is that they can withdraw their funds on demand. Moody’s is proposing a new rating scale from MF1+ to MF4, with MF1+ exhibiting a risk profile broadly consistent with Prime-1 rated investments. The proposed ratings are aimed at measuring the effectiveness of a MMF meeting investor objectives, namely (i) preserve principal; and (ii) provide liquidity.
In its response the ACT welcomed a separate rating scale for MMFs as they are different from other investment instruments and the proposed methodology incorporates additional risks including liquidity and redemption risk. The new methodology is based on a relatively equal weighting between the portfolio credit profile and the fund’s stability profile (made up of asset profile, fund liquidity and the fund’s exposure to market risk). Whilst the ACT welcomes the inclusion of the portfolio stabilities we wonder whether the underlying credit strength of the portfolio should remain the predominant driver of the overall rating. In addition Moody’s is proposing that sponsor support should be included in the qualitative assessment. We are aware that companies already take account of the sponsor name (often looking to their key relationship banks) in deciding which MMF to invest in but we do wonder if this aspect can sometimes be given a disproportionate weighting in the overall assessment.
