Fitch: MMF 'Core' European Exposures No Cause for Immediate Rating Concern

NEW YORK & PARIS--(BUSINESS WIRE)--A review by Fitch Ratings concludes that European exposures do not, at this time, pose rating concerns for rated money market funds (MMFs). At this time, MMFs rated 'AAAmmf' maintain high credit quality exposures to banks located in the 'core' European countries of France, the United Kingdom and Germany, focusing mainly on systemically important entities rated 'F1+' and limiting the weighted average maturities of their portfolios.

DIRECT EXPOSURES DO NOT POSE NEAR-TERM CONCERNS:

As of May 31, 2011, Fitch rated 54 U.S. and European 'prime' MMFs, whose investment policies permit investments in securities issued by financial and non-financial entities. Combined assets under management of these prime MMFs were approximately $823.9 billion (the list of Fitch-rated prime MMFs can be found on Fitch's website).

Fitch-rated prime MMFs, on average, allocated 20.3% of their total assets to French issuers and 15.4% and 7.5% of their total assets to issuers headquartered in the United Kingdom and Germany, respectively. These allocations include direct and indirect exposures gained via investments in asset-backed commercial paper backed by liquidity lines provided by respective banks. Collateralized exposures to respective entities acting as counterparties in repurchase agreement transactions are also included in the tallies.

Exposures to Europe were diversified among large, financially stable banks with international franchises. Many of these banks are systemically important entities that should be well positioned to manage their own exposures to peripheral Europe, especially Greece, as discussed in 'Major French Banks' Exposure to Greece' and 'German Banks' Exposure to Greece'.

For example, investments in BNP Paribas ('AA-/F1+') accounted for 5.3% of Fitch-rated prime MMFs' total assets. French banks Societe Generale ('A+/F1+') and Credit Agricole ('AA-/F1+') accounted for 4.5% and 3.9% of the funds' total assets, respectively.

Amongst the UK issuers, the largest allocation of 5.5% of total assets was to Barclays Bank ('AA-/F1+') followed by 3.6% of the funds' assets invested in Royal Bank of Scotland ('AA-/F1+') and 3.5% in Lloyds TSB Bank ('AA-/F1+').

German Deutsche Bank ('AA-/F1+'), Commertzbank ('A+/F1+') and Landesbank Hessen-Thueringen ('A+/F1+') accounted for 3.8%, 0.8% and 0.4% of the Fitch-rated MMFs' assets, respectively.

Fitch notes that these MMFs have taken proactive credit and liquidity risk management actions in response to the ongoing market volatility. As of the end of May 2011, rated MMFs maintained an average weighted-average maturity to reset date of 37 days and an average weighted-average maturity to final maturity date of 54 days indicating relatively low interest rate and liquidity risk. Moreover, these MMFs generally restrict the final maturity of any European exposures to 90 days or less. A shorter investment horizon, absent excessive redemption activity, should allow MMFs to exit specific 'at risk' credits in an orderly fashion via natural runoff rather than a forced sale of the security.

SURVEILLANCE REMAINS ONGOING IN THE FACE OF EVOLVING RISKS:

The data presented in this commentary is based on portfolio holdings provided to Fitch as part of its regular surveillance process for rated MMFs. The data represents reported portfolio holdings as of end of May 2011 and, as such, may not reflect funds' more recent (or future) portfolio composition or allocation.

Fitch's rating process for MMFs includes a regular review of portfolio data and risk metrics relative to Fitch's published rating criteria for MMFs, as well as periodic discussions with the fund manager.

Fitch will continue to monitor MMF exposures to sovereigns or financial institutions in Europe as well as shareholder redemption activities. While exposures seem manageable at present given the high credit quality overall, an abrupt deterioration could challenge MMFs' ability to exit at risk exposures and maintain preservation of capital. Fitch will comment further as warranted, including in the agency's quarterly money market fund special report.

Additional information is available at 'www.fitchratings.com.'

The sources of information were Fitch-rated MMFs' monitoring reports and Fitch Ratings.

Applicable Criteria and Related Research:

--Global Money Market Fund Rating Criteria, April 4, 2011;

--U.S. Money Market Funds Sector Update, April 14, 2011;

--U.S. Money Fund Exposure to European Banks remains Significant, June 20, 2011;

--European Banks Exposure to GIPs, June 20, 2011;

--Major French Banks' Exposure to Greece, May 16, 2011;

--German Banks' Exposure to Greece - Amended, May 25, 2011.

Applicable Criteria and Related Research:

Global Money Market Fund Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614345

U.S. Money Market Funds Sector Update: First-Quarter 2011

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=617526

U.S. Money Fund Exposure to European Banks Remains Significant

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=639850

European Bank Exposure to GIPs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=639309

Major French Banks' Exposure to Greece

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=631010

German Banks' Exposure to Greece - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=633289

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