S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Other CriteriaRating approach and processA stable NAV pool or money market fund ratingreflects Standard & Poor’s opinion of the safety ofinvested principal based on an analysis of portfoliocredit quality, market price exposure, and management.Credit quality incorporates the credit risk ofsecurities and the counterparty risk of transactionbasedinvestments, such as repurchase agreements(repos). Market price exposure relates to the potentialfor a decline in the market value of a moneymarket fund’s assets. Within this area, Standard &Poor’s looks at weighted average maturity (WAM),liquidity, investment concentration, variable-ratesecurities, securities lending and reverse repos, shareholdercomposition, and NAV deviation proceduresto name a few. In addition, the analysis of managementis based on a meeting with senior fund officials,and on both public and private information.The rating process begins when Standard &Poor’s receives a written request to rate a particularpool or fund. At this point, the analystassigned to the fund asks for certain pertinentinformation regarding the fund. Upon review ofthe information, the analyst schedules a managementmeeting with fund officials. The analyst nextdiscusses the fund with a rating committee composedof senior Standard & Poor’s Fund Services’analysts. The committee examines all relevantinformation uncovered in the rating process.Following the analyst’s rating presentation, thecommittee votes on a final rating. Subsequently,this rating is monitored on a weekly basis toensure accurate and current ratings. Additionally,Standard & Poor’s conducts annual managementreview meetings for each rated fund to evaluateany changes that may have occurred in policy, philosophy,personnel, operations, and controls.Credit qualityCredit quality analysis is focused on the risks associatedwith the quality, type, and diversity of theinstruments that comprise the portfolio. The creditquality assessment for each instrument is based onthe rating that Standard & Poor’s has assigned tothe security. The minimum credit quality standardsfor each pool are based on the fund’s rating categoryand maturity structure. For example, pools rated‘AAAm’ are expected to maintain at least 50% insecurities rated ‘A-1+’ by Standard & Poor’s withno more than 50% in securities rated ‘A-1’ byStandard & Poor’s. Additionally, securities that areon Standard & Poor’s CreditWatch list with negativeoutlooks should be limited to maturities of 30days or less. For further information and in-depthanalysis please refer to the most recent Standard &Poor’s Fund Ratings Criteria publication.Repurchase agreements (Repos)While Standard & Poor’s recognizes the importanceof the collateral securing repurchase agreements(repos), our main focus with regards to the risk inthese securities is the creditworthiness of the counterparty.Generally speaking, the underlying securitiesin traditional repos are typically ineligibleinvestments for money market funds, either becauseof their maturity (longer than 397 days) or type(e.g., certain mortgage-backed securities). A fundthat takes possession of such collateral will have tosell it as soon as possible. Any delay in a fund’sability to sell the securities could create both liquidityand market risks that are inappropriate formoney funds. This is especially true for non-traditionalcollateral, as these security types (e.g., noninvestmentgrade corporates, equities) possess higherpotential price volatility than traditional collateral.For these reasons, Standard & Poor’s ratings criteriacalls for all counterparties used by highly ratedmoney market funds to be rated either ‘A-1’ or‘A-1+’. The following bullets outline specific repocriteria for ‘AAAm’ rated money market funds andpools:■ The aggregate amount of all repos (regardless ofthe rating) with maturities of more than sevencalendar days may not exceed 10% of a fund’stotal assets.■ Overnight repos with any single ‘A-1’ issuer arelimited to no more than 25% of a fund’s totalassets.■ Repos with maturities beyond overnight and lessthan or equal to seven days with any single Issuer(‘A-1+’) are limited to no more than 25% of afund’s total assets.■ Repos with maturities beyond overnight and lessthan or equal to seven days with any single issuer(‘A-1’) are limited to no more than 10% of afund’s total assets.For these criteria, the maturity of a repo isdefined as the absolute maturity of the agreement.If, however, the agreement contains a put thatwould result in a lower effective maturity for theagreement, Standard & Poor’s will review the repodocumentation to be certain of the unconditionalnature of the put feature. Standard & Poor’s hasthe same criteria for both triparty and deliverablerepos. However, where a tri-party repo is used,Standard & Poor’s will examine the fund adviser’sprocedures ensuring that the proper type andamount of collateral is received. Standard & Poor’srepo diversification criteria for funds rated ‘AAm’,‘Am’ and ‘BBBm’ is identical to the bullets aboveexcept for the permitted exposure to ‘A-2’ issuers314 Standard & Poor’s Public Finance Criteria 2007