OVERVIEW AND SCOPE
1. This document provides additional information and guidance related to our criteria, "Principal Stability Fund Rating Methodology," published June 23, 2016, (PSFR criteria) and to our criteria "Fund Credit Quality Ratings Methodology," published June 26, 2017 (FCQR criteria). It is intended to be read in conjunction with those criteria. For a further explanation of guidance documents, please see the description at the end of this article.
2. This guidance provides additional detail with regard to how we apply the PSFR and FCQR criteria to insured U.S. bank deposits. We view the presence of Federal Deposit Insurance Corp. (FDIC) insurance for U.S. bank deposits, including those deposited at unrated banks, as generally supportive of money fund net asset value (NAV) stability (see Liquidity section in the PSFR criteria. In addition, we generally include the benefit of credit substitution as supportive of both PSFRs as it relates to money fund NAV stability and for the determination of a rating input within the FCQR methodology (see Credit Quality in section in the PSFR criteria and see the Ratings Inputs in Appendix B of the FCQR criteria) . This guidance provides additional detail with regard to how we apply the criteria when funds invest in assets benefitting from alternatives to traditional guarantees such as structured indemnity agreements.
Key Publication Information
- This article is related to "Principal Stability Fund Rating Methodology," published June 23, 2016.
- This article is related to "Fund Credit Quality Ratings Methodology," published June 26, 2017.
- We may revise our funds guidance from time to time when market dynamics warrant reevaluating the variables and assumptions we generally use in our analysis.
A. Insured Deposits (Including Investment Programs Focused On FDIC-Insured Deposits)
- We may view the presence of bank or credit union deposit insurance from the FDIC or other U.S. government-related entities (GREs), or similar support mechanisms, for deposits at unrated U.S. banks or similar financial institutions such as credit unions as supportive of money fund NAV stability.
- We generally look to the insurance or similar support from a U.S. GRE with at least "very high" likelihood of extraordinary support as being supportive of credit quality within the PSFR and FCQR criteria.
- FDIC deposit insurance or similar eligibility limits typically create a natural incentive toward bank diversification.
- In addition, the nature of FDIC insurance or similar U.S. GRE support mechanisms results in additional operational elements we consider as part of our management assessment.
3. The sections of the PSFR criteria to which this relates include:
- Our description of rating caps due to "higher-risk investments" (see Rating caps section)
- Quantitative Metrics applicable to PSFR ratings (table 1)
- Our description of limited liquidity (see Liquidity section)
4. In the Liquidity section of the PSFR criteria, we note that certain insured deposits have limited liquidity when having maturity greater than overnight, including "Pooled bank deposit programs (e.g., Certificate of Deposit Accounts Registry Service [CDARS], Deposit Liquidity Accounts, Insured Network Deposits, and Federally Insured Cash Accounts [FICA]) with a maturity of more than one business day. These nonmarketable securities typically impose fees for early withdrawal, and they may experience a delay in receiving Federal Deposit Insurance Corp. insurance payments."
5. Fund exposure, in aggregate, to investments with limited liquidity is limited to 10%. If the deposits are held at a rated bank (or other rated financial institution), we apply table 1 (and the other relevant tables) and apply our rating on the bank unless the rating falls below the eligibility criteria for the rating on the fund. When the rating on the bank falls below the minimum sufficient level to support the current fund rating as described in table 1 (and the other relevant tables), we apply the criteria as described in this guidance when insurance is present.
6. Overnight deposits are less exposed to liquidity risk because they either mature and cash is remitted to the fund, or the bank defaults on its obligations. The criteria provide specific thresholds associated with PSFR rating categories for credit quality, asset maturity, and asset diversification, each summarized in table 1 (and the other relevant tables) and referred to as PSFR quantitative metrics. We view these as supportive of NAV stability.
7. We consider the impact of credit quality of deposit investments based upon the rating on the deposit bank. When the bank is not rated, we consider if any credit substitution is applicable--for example, due to the presence of guaranties (see "Unrated guaranteed investments" in the Credit Quality section of the PSFR criteria".
8. When the deposit bank is unrated, and if there is no guaranty or similar credit substitution, deposit investments may benefit from insurance--for example, deposit insurance. When insurance is relevant, we assess whether we can substitute the creditworthiness of the insurer for that of the bank when we apply the criteria. When investments benefit from insurance from a commercial insurer, we may substitute their creditworthiness for that of the bank when the insurer considers its obligation under the policy as equal in priority to its senior-most obligations and agrees to pay without delay. When considering the credit substitution from a commercial insurer, we typically would reference the insurer's financial enhancement rating (FER) as evidence of the commitment to comply with the urgent timing requests associated with this type of financial insurance.
9. A fund may elect to invest in U.S. deposits that are not commercially insured but rather insured by a U.S. GRE with at least "very high" likelihood of extraordinary support from the U.S. government. This is often the case for funds that elect to invest in pooled bank deposit programs, some of which are provided as examples in the criteria.
10. FDIC deposit insurance eligibility limits create a natural incentive toward bank diversification. To determine diversification when funds invest in pooled bank deposit programs, we assume the limits are naturally creating effective diversification, but we do assess the pooled bank deposit program administrator's ability to look through to the banks taking the deposits and their ability to periodically report these exposures to fund managers. We assess the fund manager's ability to periodically aggregate bank exposure across pools when funds invest through more than one pooled bank deposit program. The fund's ability to periodically aggregate across programs and confirm quantitative metrics such as diversification limits are maintained when looking through the deposit programs is an important consideration to our management assessment as described below. For example, if a fund were to exceed the deposit insurance limit when separate investments are aggregated, this would render the excess amount as a higher risk investment unless the amount exceeding the FDIC limit benefits from a different credit enhancement that qualifies for credit substitution as described in the criteria.
11. To determine credit quality when funds invest in pooled bank deposit programs and credit substitution is not applicable from a guarantor or similar commercial entity, we recognize the presence of insurance or similar support from a U.S. GRE with at least "very high" likelihood of extraordinary support from the U.S. government. As with other forms of insurance, the credit substitution is sometimes less effective than when stemming from other types of financial enhancement, such as bank-issued letters of credit (LOCs), due to potential timing delays or possible rejection of claim. Nevertheless, when we apply the PSFR criteria, overnight investments benefiting from insurance from U.S. GREs with at least "very high" likelihood of extraordinary government support would receive the same treatments as "concentration eligible" GREs as described in the PSFR criteria. Our view could change if we determine that there is not at least "very high" likelihood of extraordinary support from the U.S. government. Due to nature of insurance, potential liquidity and credit risk remain, and we address it through our review both of the fund management and of the pooled bank deposit provider as described below.
12. We assess operational competence by viewing a pooled deposit program's strength when frequent and detailed reporting of underlying bank exposure is possible and reviewed periodically by fund management. It is this competence that enables our view of effective diversification. We still consider diversification as relevant because there remains the risk that a bank will fail to repay its deposit and the FDIC may delay or even reject payment. We view the likelihood of fund NAV stability as greatly enhanced through increased diversification of the underlying banks because we do not assume that multiple events will occur to regulated banks in the same week or month such that the FDIC would withhold or delay payment for multiple deposit investments. This is why we assess the operational effectiveness of the pooled bank deposit administrator and the ability of the fund manager to periodically observe the underlying bank deposit investments.
13. We understand the FDIC's goal to make deposit insurance payments within two business days of the failure of the insured institution; however, FDIC insurance payments may be delayed. In our fund analysis, we generally assume a potential delay of an additional day or two due to the timing of making a claim. As such, we generally assume FDIC payment will be available in time for a fund to use the money to meet a fund redemption request within five business days. We assess a fund's liquidity management in light of the risk of possible delayed payment from the FDIC or other insurer. We assume a stress scenario that at least one bank's FDIC insured deposit will be delayed and, as noted in the criteria, we assess management's ability to meet fund redemption requests in typical and stress scenarios.
Management And Operational Review
14. There are programs whose business objective is to collect funding from entities such as money funds and place them on deposit with banks that meet the program's eligibility criteria, one of which is that the deposits are FDIC-insured. Consistent with how we describe application of the criteria above, we assess the operations of these programs to determine how consistent the program guidelines and operations are with our criteria. Among other aspects of program operations, we typically consider:
- Program management operational ability to manage consistent with the criteria;
- Program management operational historical operations and, if the program is new, we assess the experience of the program administrators with this type of operational responsibility;
- Management experience with regard to administering the program;
- Program management's track record of failure to invest in eligible deposit accounts--i.e., amounts over the insurance limit;
- Program management operational expertise with regard to payment timing and mechanics;
- Program management operational track record;
- Any information informing the treatment of or potential delay in access to fund investment if it is caught up in a failure of a relationship bank through which funds are subsequently distributed to underlying local and regional banks;
- Program documentation; and
- Any other information we view as helpful to understand the competence of the program administrator.
15. We note our view of the program as part of our review of fund management. We may assign a financial program rating where applicable--for example, when the program is not simply a leveraging of the FDIC's implicit credit quality.
16. The sections of the FCQR criteria to which this relates is:
- Quantitative Assessment: Fund Credit Quality Matrix
- Rating inputs and withdrawn ratings
- Issuer concentration risk
- Concentration eligible GREs
17. We similarly consider insured deposits when we apply our FCQR criteria and FDIC-insured deposits when applying our FCQR criteria to funds investing in U.S. bank deposits when considering credit quality, diversification, and liquidity.
Key concept: We may view properly structured indemnity agreements as substitutes for guarantees and supportive of money fund NAV stability when we apply the PSFR criteria.
18. The sections of the PSFR criteria to which this relates include:
- Unrated guaranteed investments
- PSFR Quantitative Metrics (table 1)
19. Some financial institutions have increasingly focused on alternatives to traditional LOCs and similar contracts to enhance debt issues or other investments S&P Global Ratings doesn't already rate and may provide an indemnity--such as a deed of indemnity--in lieu of an LOC. When presented with such an alternative, we review the documentation associated with the indemnity by applying "Guarantee Criteria," Oct. 21, 2016, to assess if the indemnity is equivalent to a guaranty and, if so, to determine if credit substitution is achieved.
20. Optimally, in addition to credit substitution, an indemnity achieves the same timing mechanics as do LOCs. However, it is possible that an indemnity is structured such that (a) a claim must be made by the fund against the indemnity and (b) the indemnity pays the difference owed back to the fund with regard to its investment after determining the value (typically through liquidation) of collateral assets (which are eligible investments under the fund's investment guidelines) and which are tied to the backstop provided under the indemnity. The first condition introduces operational risk because it introduces operation dependency to the fund manager to make a claim. This is typically not present in guarantees. We accept this risk because we assess management as part of fund ratings. The second condition introduces liquidity risk to the fund since the fund manager must incorporate the potential delay in receiving funds. We incorporate the manager's approach to incorporating this risk in our review of management.
21. We do not view the combination of contract and asset as a liquid investment if the fund is responsible for selling the collateral assets as part of the structure. In addition, we view these agreements as entirely tied to the initial provider of the indemnity and generally not transferrable. However, we do not allocate this exposure to the list of assets with limited liquidity (the "illiquid basket") when the collateral is composed of assets we do view as liquid and when the provider of the indemnity or other third-party is obligated to liquidate collateral so as to make proceeds available to the fund promptly based upon our review of the agreements and liquidation mechanics.
22. Given the timing mechanics require a liquidation of collateral assets or similar method to determine the amount payable, monies may be received by the fund on a delayed basis. This means we assess the fund management's approach to liquidity management since funds may be received after the initial payment date. This means this type of credit enhancement is more complicated relative to that of a traditional LOC or guarantee.
23. We view the maturity as that of the last payment date monies are able to be paid under the indemnity. We consider management's approach as far as how they manage their liquidity resources given the potential payment delay when this is a feature of indemnities.
24. When considering portfolio asset diversification (and concentration) we consider the credit substitution provider as the obligor, and we typically aggregate all obligations of credit substitution obligors and then aggregate with any investments in obligations issued by those obligors.
Key concept: We may view properly structured indemnity agreements as substitutes for guarantees and supportive of credit quality when we apply the FCQR criteria.
25. The key sections of the FCQR criteria to which this relates is:
- Quantitative Assessment: Fund Credit Quality Matrix
- Counterparty Analysis/Other Topics
26. Similar to how we apply the PSFR criteria, when we apply the FCQR criteria, we assess indemnities provided as a source of potential credit substitution when we assess the structure as effective as described above. When effective, we apply the credit quality of the indemnity provider when considering the fund credit quality matrix and in our counterparty analysis. We also consider the structure timing when assessing liquidity.
- Fund Credit Quality Ratings Methodology, June 26, 2017
- Principal Stability Fund Rating Methodology, June 23, 2016
This report does not constitute a rating action.
This article is a guidance document for Criteria (Guidance Document). Guidance Documents are not Criteria, as they do not establish a methodological framework for determining Credit Ratings. Guidance Documents provide guidance on various matters, including: articulating how we may apply specific aspects of Criteria; describing variables or considerations related to Criteria that may change over time; providing additional information on non-fundamental factors that our analysts may consider in the application of Criteria; and/or providing additional guidance on the exercise of analytical judgment under our Criteria.
Our analysts consider Guidance Documents as they apply Criteria and exercise analytical judgment in the analysis and determination of Credit Ratings. However, in applying Criteria and the exercise of analytic judgment to a specific issuer or issue, analysts may determine that it is suitable to follow an approach that differs from one described in the Guidance Document. Where appropriate, the rating rationale will highlight that a different approach was taken.
|Analytical Contact:||Guyna G Johnson, Chicago (1) 312-233-7008;|
|Methodology Contacts:||Russell J Bryce, Farmers Branch (1) 214-871-1419;|
|Nik Khakee, New York (1) 212-438-2473;|
|Matthew B Albrecht, CFA, Centennial + 1 (303) 721 4670;|
|Michelle M Brennan, London (44) 20-7176-7205;|
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