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

Government Investment Poolon an overnight or one day basis of 5% for ‘AAm’,10% for ‘Am’ and 25% for ‘BBBm’.To ensure that repos are properly secured,Standard & Poor’s looks for certain written representationsfrom all funds investing in repos.Regarding perfection of the fund’s security interestin repo collateral, Standard & Poor’s seeks writtenrepresentations that the fund takes delivery of thecollateral. For additional information concerningwritten representation, non-traditional repos collateral,and evaluating counterparties, please refer tothe most recent Standard & Poor’s Fund RatingsCriteria publication.Market price exposureThe most important part of money market fund orstable NAV pool analysis is judging a fund’s sensitivityto changing market conditions. Money marketfunds or stable NAV pools are required to calculateperiodically the market value of their assetsto determine if the fund’s actual NAV per sharematerially deviates from $1.00-and to take action ifthere is significant deviation. Deviations of greaterthan plus or minus 0.5% create a situation inwhich the fund must offer and redeem shares at aprice other than $1.00.Although GIPs and other pooled investment vehiclesdo not necessarily have this requirement, thesame fundamental risk principles apply.Recognizing this small margin for error,Standard & Poor’s focuses heavily on the potentialdeviation in market value (referred to as marketprice exposure). To determine each pool’s marketprice exposure, the following variable are analyzedfor each pool rating:■ Weighted, average maturity (WAM)■ Liquidity■ Diversification■ Index and spread risk■ Potential dilution of a pool’s participant assetbase, and■ Security and portfolio valuation methods.Weighted average maturity (WAM)Determination of market price exposure starts with anexamination of a fund’s susceptibility to rising interestrates. The portfolio’s Weighted Average Maturity(WAM)is a key determinant of the tolerance of afund’s investments to rising interest rates. Standard &Poor’s expects funds rated ‘AAAm’ to maintain amaximum WAM of 60 days or less. However, theactual maximum WAM depends on fund size, assetvolatility, liquidity needs and participant profile. Fundswith less than $100 million in assets and/or a highlyconcentrated shareholder/participant base may be limitedto a shorter WAM, unless fund management canmake a compelling argument otherwise.Standard & Poor’s is often asked to rate smalland start-up funds that have highly concentratedshareholder positions. Standard & Poor’s is concernedabout the impact that a large redemption byone or more of the major shareholders may have onthe NAV of the fund. Consequently, until a fundhas grown to at least $100 million with a diverseshareholder base, Standard & Poor’s will seekassurances that the fund will maintain a shorterWAM. Higher WAMs are considered appropriatefor funds in lower rating categories.LiquidityThe liquidity of portfolio investments is also of criticalimportance in determining market price exposureand maintaining a stable NAV because thedegree of liquidity can affect the market value ofinvestments. The liquidity of a security refers to thespeed at which that security can be sold for approximatelythe price at which the fund has it valued orpriced. Securities that are less liquid are subject togreater price variability. Certain securities may beliquid one day, and illiquid the next. In determininga fund’s rating, Standard & Poor’s considers eachfund’s liquidity needs and its ability to quickly sellportfolio holdings if the need arises to meet cashoutflows or large redemptions. In reviewing apool’s liquidity, Standard & Poor’s analysts takeinto consideration the types of investments, theirliquidity characteristics, and concentrations byissuers and affiliates. The potential for sizabledeclines in portfolio market value increases with theproportion of relatively illiquid or less liquid investmentsin the portfolio. Longer WAMs increase thefund’s vulnerability to interest rate movements.DiversificationAs a general rule, no single issuer should representmore than 5% of fund assets. However, if mitigatingcircumstances are present, a single issuer canrepresent up to 10% to 25% depending on thematurity of the investment. ‘AAA’ rated governmentissues are excluded from this condition (see sectionentitled Government Agency Concentration).Government agency concentrationLiquidity analysis is done for all issues, no matterwhat their credit quality. For example, underStandard & Poor’s ‘AAAm’ guidelines, a fund shouldgenerally have no more than one-third of its assetsinvested in the securities of any one governmentagency. While the credit quality of these agencies isnot typically a concern, adverse publicity about anagency can cause financial markets to shun its securities.This could pose liquidity problems for fundsholding large amounts of the given agency’s paper, assuch instruments’ market values may drop materiallybelow what the fund paid for them. Standard &www.standardandpoors.com315