Ratings agency Standard & Poor's published its revised Principal Stability Fund Ratings Criteria yesterday afternoon. The announcement says, "Standard & Poor's Ratings Services has published updated principal stability fund ratings criteria, titled "Methodology: Principal Stability Fund Ratings," to enhance transparency and to help market participants better understand our approach to rating fixed-income funds that seek to maintain a stable or accumulating net asset value. The criteria changes are largely consistent with the proposals outlined in the articles "Request for Comment: Principal Stability Fund Rating Criteria," published Jan. 5, 2010, and "Request for Comment: Fund Ratings Criteria," published Sept. 17, 2010."
S&P Primary Credit Analyst Peter Rizzo tells Crane Data, "There are no surprises here." The release comments, "We received more than 20 responses from market participants on each request for comment (RFC). Based on this feedback, the final criteria reflect changes to stress test frequency, the definition of illiquid/limited liquidity, and diversification for investments in another rated fund. We adopted all other items outlined in the RFCs as proposed. The main criteria changes are summarized below and become effective Nov. 1, 2011."
The release says the changes include: "Elimination of the 'G' rating modifier that was applied when the portfolio consisted primarily of direct U.S. government securities; Establishment of explicit issuer or counterparty credit ratings (or the requirement to have a formal guaranty from a Standard & Poor's rated entity) for counterparty transactions such as repurchase agreements, reverse repurchase agreements, swaps, forward purchases, foreign-exchange contracts, and other hedging positions; Adoption of weighted average maturity (WAM) to final, or WAM(F), criteria for all PSFR categories (i.e., 'AAAm' maximum of 90-120 days); Establishment of a maximum final maturity of 397 days for all investments other than certain 'AA-' or higher-rated sovereign floating-rate securities or securities with an unconditional demand feature (i.e., put) providing for liquidity within 397 days; Expansion of guidelines for the underlying index for variable/floating-rate security resets to indices that are highly correlated (at least 95% over past five years) with three-month LIBOR in addition to the effective fed funds rate; and, Maintenance of the maturity of "nonmarketable" securities that count toward the limited liquidity/illiquid basket at greater than five business days (RFC proposed to reduce it to one business day); Introduction of monthly stress testing guidelines (RFC proposed weekly)."
They also include: "Establishment of cure periods for when a quantitative criteria metric/threshold is breached; Explanation of what we view as "higher-risk investments;" Enhancement of our qualitative review of management that includes measures to provide ratings differentiation based on management's resources, operational policies, risk management and credit analysis; Introduction of interest rate swap criteria; Revision of interfund lending criteria; Expansion on WAM adjustments attributed to investment experience of fund manager, concentration of shareholder base, and size of fund; Refinement of maximum exposure per issuer (i.e., investments in another rated fund now 10% from 25%. The RFC proposed 5%); Refinement of the treatment of municipal securities that we do not rate--specifically the use of long-term ratings from Moody's or Fitch; Implementation of more granular criteria for the 'AAm', 'Am', and 'BBBm' rating categories on the maximum exposures to muni securities only rated by Moody's or Fitch, unrated credit-enhanced variable-rated demand obligations, unrated prerefunded municipal escrow bonds, sovereign government-related entities and sovereign government-guaranteed securities, and other rated funds; and, Clarification of criteria pertaining to collateralized investments."
Finally, S&P's statement adds, "The finalized criteria also include a table summarizing all of the changes as well as a summary of responses to the two RFCs published in 2010. Standard & Poor's will host a teleconference on Tuesday, June 14, 2011, to discuss the criteria. The call will begin promptly at 11:00 a.m. Eastern Daylight time. The credit analysts participating on this call will include Peter Rizzo, Joel Friedman, and Andrew Paranthoiene. To participate in the call, please dial one of the following numbers: US/Canada Toll Free: 1-866-803-2143. Conference ID#: 5161988, Passcode: SANDP."
