In addition to their study on prime money funds (see yesterday's News, "Fitch Study on Prime MFs Shows Bank Products, CP, Agencies Dominate"), Fitch Ratings also just released "Tax-Exempt Money Market Funds Avoid Direct California GO Exposure, Face Other Challenges." The study by Fitch's Fund & Asset Manager Rating Group and written by Analyst Viktoria Baklanova and others, summarizes, "Fitch-rated tax-exempt money market funds hold no direct exposure to general obligation (GO) bonds issued by the state of California" and "maintained a nearly constant level of investments in variable-rate demand notes (VRDNs) between June 2008 and June 2009."
The summary warns, "However, exposure is concentrated among a smaller universe of VRDN letter of credit (LOC) providers and guarantors as compared with the same period of the past year, given the deteriorating financial condition of a number of such providers. The number of LOC and guarantee providers found in Fitch-rated tax-exempt money market fund portfolios decreased to 102 from 116, including the addition of 21 LOC and guarantee providers not previously utilized in connection with VRDN issuance."
Fitch adds, "Given the very short weighted average maturities (WAMs) of tax-exempt money market funds, they find themselves challenged to deliver yield in excess of fund expenses while not compromising portfolio credit quality in the current low interest rate environment. In June 2009, the average WAM of Fitch-rated tax-exempt money market funds was 20 days, and the average net seven-day annualized yield was 0.32%."
The company explains, "Tax-exempt money market funds normally seek to achieve as high a level of current income exempt from federal income tax as is consistent with preserving principal and providing liquidity. Investment portfolios of such funds are usually invested in tax-exempt obligations issued by U.S. states and subdivisions with remaining maturities of 13 months or less. As of June 30, 2009, Fitch rated the following seven tax-exempt money market funds [all rated 'AAA/V1+'] with total assets under management of approximately $41.0 billion: Alpine Municipal Money Market Fund, BlackRock Liquidity Fund: MuniFund, Evergreen Institutional Municipal Money Market Fund, Federated Tax-Free Obligations Fund, Federated Municipal Obligations Fund, Morgan Stanley Institutional Liquidity Fund Tax Exempt Portfolio, and AIM Tax-Free Investments Trust Tax-Free Cash Reserve Portfolio.
Finally, on California, Fitch says, "Fitch reviewed rated tax-exempt money market fund portfolios to determine the magnitude of exposure to GO bonds and certain lease appropriation bonds issued by the state of California concurrent with the heightened budgetary and cash flow pressures facing the state. As of June 30, 2009, Fitch-rated funds no longer had any investments in such securities. Such funds retained exposure to securities of other municipal issuers within the state of California, although these entities are typically more highly rated than the state GOs and/or are further supported by credit enhancement and liquidity facilities from an appropriately rated bank or financial institution.... [F]unds' allocation to issuers in the state of California increased to 4.7% in 2009 from 2.1% in 2008. However, the increase reflects investments in VRDNs backed by LOCs or guarantees by highly rated entities, and not direct exposure to California state GOs."
