Fitch Ratings recently affirmed the ratings of 61 European short-term money market funds (MMFs) at ’AAAmmf’. Rated funds are conservatively positioned, with average liquidity levels well above minimum rating and regulatory ranges. While high liquidity levels increase rating headroom, they also show that funds are positioned for adverse developments, such as potential sudden and/or severe redemptions and the possibility of renewed disruption to the secondary market.
Rated non-government funds’ Portfolio Credit Factors (PCFs), which are a risk-weighted measure that considers the credit quality and maturity profile of the portfolio’s securities, have decreased on average between February and September 2020 to 0.91 from 1.11, indicating a modest improvement in credit quality. The decrease in PCFs was driven by an overall reduction in funds’ weighted average life (WAL), with end-September average WAL at 52 days, a decrease from 64 days at end-February 2020.
Rated non-government funds’ liquidity levels have increased on average between February and September 2020, with Fitch-defined overnight liquidity at 38% (from 28% at end-February 2020) and weekly liquidity at 52% (from 41% at end-February 2020) as of end-September 2020. However, underlying these averages is a wide range of liquidity positions undertaken by individual funds, with a variation of 56pp for Fitch overnight liquidity levels and 45pp for weekly liquidity at end-September 2020. This variation is a function of the stability of funds’ investor bases and, at the margin, funds’ varying risk appetites.
Assets under management (AUM) for the peer group rebounded to an approximate EUR714 billion equivalent at end-September 2020, from EUR590 billion in March. Overall AUM in rated funds declined by 6% in March 2020, although asset volatility was high intra-month. USD-denominated government funds saw an AUM increase of 66% while USD-denominated non-government funds experienced a decrease of 30%, due mainly to redemptions. Outflows in March 2020 were most severe in the USD-denominated low volatility net asset value MMFs in Fitch’s sample.
Fitch assessed rated MMFs under baseline and downside stress scenarios in light of the COVID-19 outbreak. Fitch’s stress tests assess sensitivity to assumed redemptions and rating downgrades. Fitch’s liquidity baseline stress test scenario assumes a daily outflow of 10%. Fitch’s liquidity downside stress scenario additionally assumes an overall weekly outflow of 40%. On the credit side, Fitch’s baseline stress test scenario assumes all securities on Rating Watch Negative by Fitch are downgraded by one notch. Fitch’s credit downside stress scenario assumes all securities on Rating Outlook and Rating Watch Negative by Fitch are downgraded by one notch. Stressed long-term ratings are mapped to their short-term ratings under Fitch’s MMF Criteria to assess the impact on PCF.
Fitch’s stress test results show that the ratings are robust under the baseline stress cases. Three funds breached the weekly liquidity benchmark of 30% for ’AAAmmf’ in Fitch’s liquidity downside stress scenario. However, Fitch identified significant mitigating factors in all three cases. Four funds experienced a breach of the PCF benchmark of 1.50 for ’AAAmmf’ in Fitch’s credit downside stress scenario, although breaches were marginal in three of the four cases. In addition, six funds showed post-stress exposure to securities that could be downgraded to ’F2’ but Fitch believes that the funds would be able to adjust their positions swiftly, given their short maturities.
