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Fitch Affirms 2 Morgan Stanley Institutional Liquidity Portfolios at 'AAAmmf'

^{Published on 2011-10-28 12:46:57 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed Morgan Stanley Institutional Liquidity Fund: Prime Portfolio (Prime Portfolio) and Morgan Stanley Institutional Liquidity Fund: Tax-Exempt Portfolio (Tax-Exempt Portfolio) at 'AAAmmf'. The two money market funds are managed by Morgan Stanley Investment Management, Inc. (MSIM), a wholly owned subsidiary of Morgan Stanley (NYSE: MS).

KEY RATING DRIVERS:

The main drivers for the ratings affirmation are:
-- the portfolios' overall credit quality and diversification;
-- short maturity profile;
-- minimal exposure to interest rate and spread risks;
-- overnight and one-week liquidity profile;
-- the capabilities and resources of MSIM as investment advisor.

The 'AAAmmf' money market fund ratings reflect the funds' extremely strong capacity to achieve the investment objectives of preserving principal and providing shareholder liquidity through limiting credit, market and liquidity risk.

PORTFOLIO CREDIT QUALITY/DIVERSIFICATION
The funds maintain high credit quality portfolios consistent with Fitch's criteria for 'AAAmmf'-rated money market funds. The funds invest exclusively in short-term securities rated at least 'A/F1' by Fitch or equivalent. Counterparty risk is limited by transacting with entities rated 'F1' or higher, or those that are integrated members of financial institutions rated 'A/F1' or higher. The funds also limit concentration risk arising from investments in individual issuers.

Each fund's Portfolio Credit Factor (PCF) met Fitch's 'AAAmmf' rating criterion of 1.50 or less. The PCF is a risk-weighted measure of the funds' portfolio assets that accounts for the credit quality and maturity profile of a fund's portfolio securities.

MATURITY PROFILE
Both portfolios seek to limit interest rate and spread risk consistent with Fitch's ratings criteria for funds rated 'AAAmmf'. Each portfolio limits its weighted average maturity to reset date (WAMr) and weighted average final maturity (WAMf) to 60 days and 120 days, respectively. As of Oct. 5, 2012 the Prime Portfolio had a WAMr of 18 days and a WAMf of 30 days, while the Tax-Exempt Portfolio had both WAMr and WAMf at 24 days.

LIQUIDITY PROFILE
The portfolios' additional investment restrictions are aimed at maintaining sufficient levels of daily and weekly liquidity to meet investors' redemption requests. In line with amended Rule 2a-7 under the Investment Company Act of 1940, which governs the investment activities and operations of U.S. money market funds, the Prime Portfolio must invest at least 10% of total assets in daily liquid assets and at least 30% of total assets in weekly liquid assets. According to the same regulation, the Tax-Exempt Portfolio must invest at least 30% of total assets in weekly liquid assets. As of Oct. 5, 2011, both portfolios met the liquidity requirements mandated by Rule 2a-7 and were also in line with the liquidity guidelines outlined in Fitch's rating criteria.

FUND OBJECTIVES
The Prime Portfolio seeks preservation of principal, daily liquidity and maximum current income. The Prime Portfolio pursues its investment objectives by investing in a diversified, high-credit quality portfolio of money market securities maturing in 13 months or less, with an emphasis on overnight and shorter-term maturities. The portfolio's principal investment strategies permit investments in U.S. government and agency securities, commercial paper and other corporate debt obligations of U.S. and foreign financial corporations and U.S. non-financial corporations, short-term taxable and tax-exempt municipal obligations, asset-backed securities and repurchase agreements.

The Tax-Exempt Portfolio seeks to maximize current income exempt from federal income tax to the extent consistent with preservation of principal and maintenance of liquidity. The Tax-Exempt Portfolio seeks to achieve its investment objectives by investing at least 80% of its assets in short-term municipal obligations, interest of which is exempt from federal income taxes and is not subject to the federal alternative minimum tax. The portfolio may invest up to 20% of its assets in taxable money market securities or in municipal obligations that pay interest income that may be subject to the alternative minimum tax. In addition, the portfolio may temporarily invest more than 20% of its assets in taxable money market securities for defensive purposes in attempting to respond to adverse market conditions.

INVESTMENT ADVISOR
MSIM, together with its investment advisory affiliates, had more than 628 investment professionals around the world and approximately $268 billion in assets under management or supervision as of Sept. 30, 2011. MSIM provides investment management solutions to a diverse client base, which includes governments, institutions, corporations and individuals worldwide. Fitch views MSIM's investment advisory capabilities, resource commitment, operational controls, corporate governance, and compliance procedures as consistent with the rating assigned to the funds.

RATING SENSITIVITY AND SURVEILLANCE:
The rating may be sensitive to material changes in the credit quality or market risk profiles of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch. Furthermore, given the funds' investment mandates, the ratings may be sensitive to material adverse changes in the U.S. economy, and specifically, the municipal and financial sectors.

Fitch seeks weekly fund and portfolio holdings information from the funds' sub-administrator - State Street Bank and Trust Company - to conduct surveillance against ratings guidelines and maintain its money market fund ratings.

Up-to-date surveillance and analytical information on these funds are available in the Funds Surveillance section of Fitch's website ([ www.fitchratings.com ], 'Surveillance' > 'Funds').

The sources of information used to assess this rating were the public domain and MSIM.

Additional information is available at [ www.fitchratings.com ]. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Global Money Market Fund Rating Criteria', Apr. 4, 2011;
--'U.S. Money Market Funds Sector Update, Oct. 18, 2011;
--'U.S. Money Funds and European Banks: French Exposure Down,' Oct. 20, 2011;
--'U.S. Money Market Funds: Repurchase Agreement Practices', Oct. 4, 2010.

Applicable Criteria and Related Research:
Global Money Market Fund Rating Criteria
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614345 ]
U.S. Money Market Funds Sector Update: Q3 2011 -- AMENDED
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=654012 ]
U.S. Money Funds and European Banks: French Exposure Down
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=653901 ]
U.S. Money Market Funds: Repurchase Agreement Practices
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=562906 ]

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