Moody’s: Split-Rated ABCP Remains Attractive

 Moody’s Investors Service said in a report on Monday said that investors continue to buy U.S. and EMEA programs that the ratings agency downgraded to a tier 2 status from a tier 1 status in 2012.  

For sponsors and sellers, many of the downgraded ABCP programs have also remained attractive funding platforms -- 16 of the 21 programs Moody’s downgraded in 2012 continue to issue ABCP in either the U.S. commercial paper (USCP) or European commercial paper (ECP) markets, with an aggregate outstanding amount of $34.4 billion USCP and $33.8 billion ECP as of 30 September 2012.

But these programs only remain investable to the extent that they have retained the highest rating of at least two major credit rating agencies and are therefore still considered first tier from the standpoint of the Securities and Exchange Commission’ rule 2a7 of the 1940 Investment Company Act, which severely restricts the percentage of assets that money market fund investors, ABCP's biggest buyers, can allocate to tier II investments (those rated P-2 or A-2).

“It’s not really rocket science; but if Fitch Ratings and/or Standard & Poor’s downgrade the same banks Moody’s downgraded the money markets will have a problem,” said one industry source.   

In June, Moody’s downgraded several key U.S. banks, impacting the ABCP operations of these banks. Among the banks that Moody’s downgraded include JPMorgan Chase, Bank of America Merrill Lynch, Morgan Stanley, and Goldman Sachs.  In terms of the asset-backed market, the downgrades included banks that have ABCP programs such as Citibank and The Royal Bank of Scotland (RBS), both of which had their short-term rating downgraded to ‘Prime-2 (sf)’ from ‘Prime-1 (sf).’

Fitch this year only downgraded one ABCP program in the U.S. back in May because the sponsor bank, JP Morgan, was downgraded.  

Deborah Cunningham, chief investment officer for global money markets at Federated Investors said that although the Moody’ downgrades hasn’t presented a technical problem from an SEC perspective, it does present an image problem for money market fund investors.

Cunningham said that less than 5% of MMFs actually use any type of  tier 2 or split rated issuance and the amount of those spilt rated or tier 2 rated issues that are actually asset backed related is close to zero.

“ABCP is just viewed as a more complicated product that have risks associated with it from a contractual perspective and no one wants to see second tier risk at that level,” said Cunningham. “There are still outstanding amounts for these programs in the market place, I would be surprised to find very much of any of them in money market fund portfolios.”