December 21, 2007 / 3:48 PM / 12 years ago

UPDATE 2-BlackRock halts fund's redemptions; rating cut

(Adds BlackRock comments, stock price)

By Muralikumar Anantharaman

BOSTON, Dec 21 (Reuters) - Money manager BlackRock Inc (BLK.N) has suspended cash redemptions on a $1 billion fund for institutional investors, leading Moody’s Investors Service to cut its ratings on the fund to “junk” status.

The move by the BlackRock Cash Strategies LLC cash management fund reflects “extremely unfavorable liquidity conditions,” the largest publicly traded U.S. asset manager said in a letter to investors on Friday.

“Market events have drastically reduced the liquidity of a number of securities held in the portfolio,” BlackRock said in the letter obtained by Reuters. “In addition, announcements related to similar products managed by other investment managers led to numerous redemption requests earlier in December.”

As a result, the portfolio did not have enough liquidity to honor all redemptions in cash, the letter said. BlackRock said it was honoring redemptions in the form of securities for the fund.

BlackRock Cash Strategies is not a money market fund, the company said.

The move comes after Bank of America Corp’s (BAC.N) Columbia asset management unit closed a cash management fund to new institutional investors due to troubles in the short-term debt markets. A similar fund managed by General Electric Co (GE.N) also faced troubles and saw some investors cash out.

Since the BlackRock fund’s suspension of cash redemptions on Dec. 10, every client has chosen to stay invested, the company said. The fund has about 25 institutional investors.

BlackRock said the net asset value of the fund remained at $1 per share, and it expected the securities in the portfolio to mature at par. A number of securities held by the fund are supported by a capital support agreement that protects the fund’s net asset value, the company said.

“The CSA provides up to $70 million of protection against losses incurred and is supported by BlackRock and a standby letter of credit from Wachovia Bank,” BlackRock said. “None of the securities in the fund has defaulted or extended or been downgraded below the guidelines for the fund.”

Moody’s lowered the credit rating on BlackRock Cash Strategies from “Aaa,” the top rating, to “Ba,” which is in speculative-grade territory. The fund’s market risk rating was also dropped to MR2, from MR1, to reflect ongoing stress in capital markets.

In explaining the downgrade, Moody’s said the “weighted average credit quality” of the fund’s portfolio had remained consistent with its “Aaa” rating, but cited BlackRock’s decision to suspend redemptions.

Moody’s also said it had withdrawn its ratings for the fund at the manager’s request.

Rival ratings agency Standard & Poor’s earlier this week affirmed its “AAA” rating on the fund, BlackRock spokesman Brain Beades said.

Moody’s downgrade of the fund did not seem to affect BlackRock shares, which in the afternoon were up 4.7 percent at $214.72 in a firm stock market.

BlackRock, which managed $1.3 trillion in assets overall at the end of September, was selected earlier this month as lead manager of a backup fund created by America’s three largest banks to help buy assets from failing structured investment vehicles in order to ease turmoil in the markets. (Additional reporting by Neil Shah)

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