- We have reviewed BSBY (Bloomberg Short-Term Bank Yield Index) and determined it is consistent with our principal stability fund ratings (PSFR) methodology as an "anchor" money market reference rate.
- Therefore, we would not classify a fund's exposures to floating-rate securities referencing BSBY as "higher-risk investments."
- Funds we rate under our PSFR methodology typically invest in rated assets, including those linked to an anchor money market reference rate index we have reviewed.
- When we rate financial obligations, and the principal or interest payment amount is variable and linked to an index, we typically assess the reliability and governance of the index.
As the transition away from LIBOR continues, another potential successor has been introduced--the Bloomberg Short-Term Bank Yield Index (BSBY). BSBY seeks to measure the average yields at which large global banks access U.S. dollar senior unsecured marginal wholesale funding. S&P Global Ratings has determined that BSBY is consistent with our principal stability fund ratings (PSFR) methodology as an "anchor" money market reference rate. As a result, we would not classify exposures to floating-rate securities referencing BSBY as "higher-risk investments," subject to our assessment of their credit quality, diversification, and maturity metrics.
We've received information that demonstrated how BSBY would have moved in the past five years. Our review found that BSBY is highly correlated to LIBOR, which we view as an anchor money market reference rate for various tenors such as overnight and one, three, six, and 12 months.
In addition, we previously reviewed the Secured Overnight Financing Rate (SOFR) and the Euro Short-Term Rate (ESTR) as alternative anchor money market rates and determined that instruments pricing off these indices also will not constitute "higher-risk investments," as described in our PSFR criteria.
BSBY Is Consistent With Our Ratings Definitions
When assigning credit ratings to financial obligations, and the principal or interest payment amount is variable and linked to an index, we consider our applicable ratings definitions. In particular, we view BSBY as consistent with our ratings definitions, including:
- We view BSBY as a reasonable successor to a long-standing index (i.e., LIBOR);
- We believe BSBY will be readily accessible on websites widely available to market participants; and
- We believe BSBY is independent and is calculated in a transparent, consistent, and verifiable manner.
Extract From "S&P Global Ratings Definitions," Jan. 5, 2021
145. Even if the payment amount is variable for the principal or interest component, such a component can still have a ratable promise if it satisfies either of the following two conditions:
- It is linked to an inflation-related index (including a minimum wage index), currency index, or interbank rate for the interest, and such an index (1) has an established track record or is considered by S&P Global Ratings as a successor to a long-standing index, (2) is readily accessible, such as posted on a public website, (3) is independent, for example, calculated by a third party independent of the issuer, and (4) is calculated in a transparent, consistent, and verifiable manner. For the purpose of this and previous paragraphs, we consider precious metals, such as gold and silver, to be commodities rather than currencies.
- For the interest component, even if no index is used, the promise to pay is based on a rate that is periodically determined by an independent third party according to an established market-based process, for example as in auction-rate securities and some variable-rate demand obligations.
Considerations When Assessing The Transition From LIBOR To Alternative Benchmark Indices
Our PSFR criteria state that index and spread risks introduce potential price volatility to assets commonly held by funds assessed for principal stability. The key principle guiding our assessment of the index and spread risk is potential price volatility that could affect the stability of a fund's net asset value (NAV). We also consider risk characteristics such as credit, concentration, duration, and liquidity, which could play a role in the stability of an asset's price and, in turn, the fund NAV.
We may view exposures to variable-rate securities tied to indices as higher-risk investments when we view the index as potentially illiquid, or highly volatile such that a manager may not reasonably be able to manage the index risk. Typically, variable-rate notes and floating-rate notes (FRNs) tied to indices that we do not view to be anchor money market reference indices are considered higher-risk investments.
Some characteristics we focus on when analyzing index and spread risks include:
- Asset liquidity--our expectation of the liquidity of assets pricing off the designated index;
- Correlation--our expectation the FRN pricing will move in tandem with an anchor money market reference index;
- Management--our expectation of the fund manager's ability to manage the interest rate risk of the portfolio assets and the fund's NAV per share; and
- Investor confidence--our expectation of investor confidence in the index, including the factors described in our ratings definitions.
- Principal Stability Fund Rating Methodology, June 23, 2016
- S&P Global Ratings Definitions, Jan. 5, 2021
- What Will Change With The New Euro Short-Term Rate, Oct. 1, 2019
- The Secured Overnight Financing Rate (SOFR) Is Consistent With Our Principal Stability Fund Ratings Criteria, July 30, 2018
This report does not constitute a rating action.
|Primary Credit Analysts:||Guyna G Johnson, Chicago + 1 (312) 233 7008;|
|Michael Masih, New York + 1 (212) 438 1642;|
|Secondary Contact:||Andrew Paranthoiene, London + 44 20 7176 8416;|
|Methodology Contacts:||Nik Khakee, New York + 1 (212) 438 2473;|
|Russell J Bryce, Charlottesville + 1 (214) 871 1419;|
|Michelle M Brennan, London + 44 20 7176 7205;|
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