Ratings for Local Government Investment Pools

Transcription

1 Ratings for Local Government Investment Pools Roger Merritt, Managing Director Government Investment Officers Association Las Vegas, March 2012

2 Agenda / overview Fitch s rating criteria for local government pools Credit Rating Volatility Rating Additional Risk Factors Assessment of the pool management Surveillance New Market Developments Downgrade/Outlook Negative on U.S. Appendix A: Examples of research Appendix B: Rating definitions 2

3 Rating Local Government Pools Apply Global Bond Fund Rating Criteria Rating for local pools comprises fund credit and volatility ratings Includes assessment of capability of the pool management Frequent reviews of pool holdings and other key risk metrics Ongoing communication with the pool management, including onsite reviews 3

4 Fund Credit Rating Measures vulnerability to credit losses Factors in credit quality/diversification Driven by weighted average rating factor (WARF). WARF: the market value weighted sum of each security credit rating factor, affording credit to securities with shorter maturities. <=90 Days 91 Days 13 Months > 13 Months AAAGov AAA AA AA AA A A A F F

5 Fund Volatility Rating Stability of market risk profile as reflected by duration Volatility Rating V1 V2 V3 V4 Duration Within 2 years Between 2 and 4.5 years Between 4.5 and 7.5 years Between 7.5 and 12.5 years 5

6 Summary of Rating Guidelines Credit Rating WARF AAA AA AA AA Diversification Best practices 5-10% per issuer Liquidity Best practices examination of management cash flow capabilities, dependant on nature of depositor base (captive/voluntary) Volatility Rating Duration V1 V2 V3 V4 Spread Factor AAA AA A BBB BB B CCC and below Leverage Within 2 years Between 2 and 4.5 years Between 4.5 and 7.5 years Between 7.5 and 12.5 years Generally, not used in public funds 6

7 Surveillance is Key to Ratings Active surveillance process is critical to ensure existing ratings remain appropriate Monthly surveillance checks against Fitch s rating criteria Based on portfolio holdings and key credit and market risk metrics Monitor mark-to-market valuation and investor concentrations Periodic onsite reviews to assess the pool management, processes, procedures and systems Rating commentaries available on 7

8 Recent Developments: Effect of the U.S. Outlook Negative on the Rating of Public Funds U.S. AAA rating put on Outlook Negative Nov. 28, 2011 No impact on pool ratings Weighted Average Rating Factor was negatively affected however, Negative effect may be mitigated by the short-term nature of securities. Fitch views a WARF of 0.26 or lower as consistent with an AAA Fund Credit Rating 8

9 Appendix A: Examples of Research Full rating report: - Key rating drivers - Investment pool analysis - Information about pool management 9

10 Appendix B: Fund Credit Rating Definitions AAA AA A BBB BB B CCC Indicate the highest underlying credit quality (or lowest vulnerability to default). The assets of the fund are expected to maintain a WA portfolio rating of AAA. Indicate a very high underlying credit quality. The assets of the fund are expected to maintain a WA portfolio rating of AA. Indicate high underlying credit quality. The assets of the fund are expected to maintain a WA portfolio rating of A. Indicate good underlying credit quality. The assets of the fund are expected to maintain a WA portfolio rating of BBB. Indicate speculative underlying credit quality. The assets of the fund are expected to maintain a WA portfolio rating of BB. Indicate very speculative underlying credit quality. The assets of the fund are expected to maintain a WA portfolio rating of B. Indicate substantially speculative underlying credit quality, in the form of material exposure to assets whose default is imminent or inevitable Source: Fitch 10

11 Appendix B: Fund Volatility Rating Definitions V1 V2 V3 Very Low Market Risk: considered to have very low sensitivity to market risk. Total returns are expected to exhibit high stability, performing consistently across a broad range of market scenarios. These funds offer very low risk exposure to interest rates, credit spreads and other risk factors and have a representative market risk factor of less than two. They are generally short-term government or high credit quality bond funds. Low Market Risk: considered to have low sensitivity to market risk. Total returns are expected to exhibit relative stability, performing consistently across a broad range of market scenarios. These funds offer low risk exposure to interest rates, credit spreads and other risk factors and have a representative market risk factor of 2 to 4.5. They are typically short- to medium-term government or high credit quality bond funds with various investment objectives. Moderate Market Risk: considered to have moderate sensitivity to market risk. Total returns are expected to perform consistently over medium- to long-term holding periods, but will exhibit some variability over shorter periods due to greater exposure to interest rates, credit spreads and other risk factors. These funds usually have a representative market risk factor of 4.5 to 7.5 and are generally medium-term government or short-term corporate bond funds. 11

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