TEXT-Fitch:MMFs appetite for non-US Quasi-Sovereigns;criteria considerations

Wed Oct 31, 2012 7:19am EDT

Oct 31 - Fitch Ratings says that European money market funds (MMFs) have demonstrated a fast growing appetite since Q411 for assets issued by supranationals and government agencies, notably highly-rated European ones. The agency clarifies in this context those entities that would be considered as quasi-sovereigns for the purpose of Fitch global MMF rating criteria.

Since October 2011, Fitch-rated European MMFs have increased their allocation to assets issued by quasi-sovereigns, which reached a peak at 11% in April (vs. less than 2% eight months ago). At end-September 2012, more than three quarters of the funds were invested in such issuers. This trend notably benefited highly-rated European government agencies, such as FMS Wertmanagement, Erste Abwicklungsanstalt, Kreditanstalt f?r Wiederaufbau (KfW), Caisse d'Amortissement de la Dette Sociale (CADES) or Unedic.

Fitch's Global Money Market Fund (MMF) rating criteria recognises the strong liquidity and high credit quality of assets issued by highly-rated supranationals and most government agencies or other public sector entities, jointly referred to as quasi-sovereign entities. While in the US these are clearly defined, their features are more opaque in other countries where their legal status and the nature of their relationship with their sovereign parent, vary from one country to another, and from one entity to another.

Not all public sector entities would be considered as quasi-sovereigns for the purpose of Fitch MMF rating criteria. To identify those entities that qualify for being considered as quasi-sovereign under Fitch MMF criteria, key factors that are assessed include the level of integration within the sovereign government bodies, the legal status and nature of the government guarantee, the level of control from the sovereign, and the public and strategic nature of its activities in a non-competitive sector.

Fitch applies specific criteria guidelines for highly-rated ('AA' category or higher) quasi-sovereigns benefiting from strong market liquidity in various areas. These include: available weekly portfolio liquidity, individual issuer exposure, counterparty exposure arising from repurchase agreements (repo), maturity of portfolio securities and Fitch's Portfolio Credit Factor (PCF).

As they issued more short-term debt in H211, non-US quasi-sovereigns have partially filled a gap between MMFs' strong demand for high quality issuers outside of the banking sector and the narrow market of strong short-term sovereigns (or alike) in sterling and euro. In spite of the low yield they deliver, Fitch believes that MMFs' appetite for such assets is far from being satisfied, given market supply constraints. As such, MMFs could prove natural buyers of short-term Eurobonds (or euro Treasury-Bills), should they be issued one day.

Link to Fitch Ratings' Report: Non-US Quasi-Sovereigns in Money Market Funds

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