Essential Intelligence: Special Purpose

Local Government Investment Pools

S&P Global Ratings has been rating Local Government Investment Pools (LGIPs) since 1992, and are one of the leading credit rating agencies in this sector within the United States. We are able to analyze LGIPs consisting of both internal and external participants where the management team is an experienced investment team and/or outsourced to an investment advisor.

We assign three different types of ratings to LGIPs based on the pool’s investment objective:

Principal Stability Fund Ratings are our forward-looking opinion about the ability of a LGIP to maintain stable principal and limit exposure to principal losses due to credit risk. The rating categories for LGIPs ratings based on the PSFR methodology, range from 'AAAm' (extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit risk), to 'Dm' (failure to maintain principal stability resulting in a realized or unrealized loss of principal). PSFRs are identified by the 'm' suffix to distinguish it from an S&P Global Ratings traditional issue or issuer credit rating, which by comparison, reflects our view of a borrower's ability to fully and timely meet its financial obligations.

Fund Credit Quality Ratings address the overall credit quality of a fixed-income investment fund and are derived from our historical default and transition studies that go back more than 35 years. Rating categories range from 'AAAf' (for funds where their portfolio exposure is extremely strong) to 'Df' (for funds that are predominantly exposed to defaulted assets and/or counterparties). Those funds assigned Fund Credit Quality Ratings typically offer a variable net asset value. Fund Credit Quality Ratings typically accompany Fund Volatility Ratings.

Fund Volatility Ratings are our forward-looking opinion about a fixed-income investment fund's volatility of returns relative to that of a "reference index" denominated in the base currency of the fund. Primarily the assessment evaluates the fund's sensitivity to risks that may affect returns such as interest rate risk, credit risk, and liquidity risk along with the use of derivatives, leverage or exposure to foreign currency risk. Fund Volatility Ratings are expressed on a scale from 'S1' (lowest volatility) to 'S5' (highest volatility).

We perform weekly surveillance on LGIPs rated pursuant to the PSFR methodology, and monthly on FCQR/FVRs, methodology in order to form a view on whether any changes in the portfolio and management’s operating policies may alter the fund's credit profile and, therefore, the rating. S&P Global Ratings also conducts an annual management review to identify any changes in management, policy, strategy, and operations. During volatile market conditions, we typically enhance our standard surveillance to assess whether LGIPs are maintaining the relevant fund metrics. Enhanced surveillance, which may include daily interactions with the LGIP investment team or investment advisors, is fundamental to our rating process during periods of market volatility.