April 20, 2015 / 1:31 PM / 4 years ago

Fitch Affirms 6 South African Money Market Funds at 'AA+(zaf)'/'V1(zaf)'

(The following statement was released by the rating agency) LONDON/PARIS, April 20 (Fitch) Fitch Ratings has affirmed the National Fund Credit Quality Ratings (NFCQRs) and National Fund Volatility Ratings (NFVRs) of six South African Money Market Funds (MMFs) at 'AA+(zaf)'/'V1(zaf)'. The funds are Absa Money Market Fund (AMMF), Investec Corporate Money Market Fund (ICMMF), Momentum Money Market Fund (MMMF), Nedgroup Investments Corporate Money Market Fund (NICMMF), Nedgroup Investments Money Market Fund (NIMMF) and STANLIB Corporate Money Market Fund (SCMMF). The funds' investments advisors are Absa Asset Management, Investec Asset Management, Momentum Asset Management, Taquanta Asset Managers on behalf of Nedgroup Collective Investments, and STANLIB Asset Management, respectively. As of end-February 2015, the combined assets under management of these funds were approximately ZAR117bn. Updated rating reports will soon be made available on Fitch's website. KEY RATING DRIVERS Asset Credit Quality The 'AA+(zaf)' NFCQRs of the MMFs are driven by the funds' high current and prospective credit quality, as reflected by their weighted average rating factors (WARF) and rating distributions. The NFCQRs factor in a one-notch downward adjustment from their WARF implied ratings to reflect concentration risk, a structural feature of the South African market. In Fitch's opinion, rated South African MMFs are concentrated because the top three-issuer exposure is consistently in excess of 50% of portfolio holdings. In line with its applicable rating criteria, Fitch typically adjusts down the WARF-implied NFCQR of funds it deems concentrated by one or more notches. This reflects the funds' investment mandates and the structural characteristics of the South African market, with a limited supply of treasury bills, and the five largest banks having a combined market share of around 90%, according to Fitch's estimates. Without structural evolution of the South African market resulting in a more diverse, high quality and liquid issuance market, it is highly unlikely that Fitch would rate any MMF higher than 'AA+(zaf)' in South Africa. The MMMF is less concentrated than rated peers primarily due to its greater exposure to corporate issuers. In this case, Fitch views a single-notch adjustment as still appropriate to reflect both the moderate concentration risk posed by the fund and its exposure to lower credit quality issuers relative to peers. Portfolio Sensitivity to Market Risk The funds have low exposure to interest rate risk and spread risk, as reflected by their short maturity profiles. As per regulation, the funds' weighted average duration (i.e. to next interest rate reset date) is capped at 90 days and weighted average life (i.e. to final maturity date) at 120 days, and no investment may have a maturity of greater than 13 months. This enables the funds' to achieve a NFVR of 'V1(zaf)'. Fund Profiles The funds are regulated by South Africa's Financial Services Board under the Collective Investment Schemes Control Act of 2002 (CISCA, specifically Notice 90 of 2014). The AMMF, ICMMF, MMMF, and the NICMMF are also compliant with Regulation 28 of the Pension Funds Act, making them eligible investments for South African pension schemes. Regulation 28 caps maximum issuer exposure at 25% whereas the maximum issuer exposure permitted under CISCA is 30%. The NIMMF and SCMMF are not Regulation 28-compliant. Investment Advisors Fitch considers all of the investment advisors as suitably qualified, competent and capable of managing the funds. RATING SENSITIVITIES The ratings of the funds may be sensitive to material changes in the funds' credit quality or market risk profile. A material adverse deviation from Fitch criteria for any key rating driver could cause ratings to be downgraded by Fitch. Specifically, Fitch would expect to downgrade the NFCQR in the event of a sustained deterioration in any of the funds' credit quality. Given the maturity profile of the funds and the regulatory limits, the NFVRs are expected to be stable. However, should interest rates or market volatility in South Africa structurally change then Fitch would expect to downgrade the ratings. RATING CRITERIA Fitch rates money market funds (MMFs) in South Africa under its global bond fund rating criteria. This reflects the differences the agency perceives between South African MMFs and other Fitch-rated MMFs under its international and national MMF rating criteria. Specifically, the high level of concentration in these funds, a structural characteristic of the South African market, is inconsistent with Fitch's view of the risk profile of a MMF. The agency also notes regulatory differences between the US and European MMFs (subject to Rule 2a-7 in the US and ESMA guidelines for MMFs in Europe) and the regulatory regime in South Africa. MMFs in South Africa also have a greater reliance on secondary market liquidity than US and European MMFs, and often have mismatches between the largest investors and overnight liquidity. Funds in the 'AA(zaf)' rating category are considered to have very high underlying credit quality relative to other entities in the South African market. The fund's assets are expected to maintain a weighted-average portfolio rating of 'AA(zaf)'. Funds rated 'V1(zaf)' are considered to have low sensitivity to market risk. On a relative basis, total returns of funds rated 'V1(zaf)' are expected to exhibit high stability, performing consistently across a broad range of market scenarios. The NFVR does not address the sensitivity of a bond fund to extreme risks that may result from reduced liquidity in secondary markets during certain periods of time. Comparisons between different national fund rating scales or between an individual national and international scale are inappropriate. To maintain the funds' ratings, the funds' administrator and/or investment advisors provides Fitch with monthly information, including details of the portfolio's holdings and credit quality. Contacts: Primary Analyst Richard Woodrow, CFA Associate Director +44 20 3530 1388 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Alastair Sewell, CFA Senior Director +44 20 3530 1147 Committee Chairperson Charlotte Quiniou, CFA Director +33 1 44 29 92 81 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The sources of information used to assess this rating were the public domain, each investment manager, and each fund's administrator Applicable criteria, "Global Bond Fund Rating Criteria", 12 December 2014, are at www.fitchratings.com. Related Research South African Money Market Funds: Effect of African Bank Exposure Limited Applicable Criteria and Related Research: Global Bond Fund Rating Criteria here 2015 Outlook: South African Banks here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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