Ratings

We generally evaluate each situation based on the severity of the developments to the particular fund and whether the event was an "active" or "passive" occurrence. If a fund's WAM moved one day past the maximum for a particular rating category, we would generally consider this less severe than a money market fund's NAV falling to $0.9979. We are more likely to take rating action if a fund's NAV drops to $0.9979 than if the WAM moved one day beyond the criteria, because we believe the fund's principal stability would be at a greater risk.

An "active" situation is a result of specific action(s) the fund's management takes (e.g., buying a security that does not meet 'AAAm' criteria). An example of a "passive" situation would be an unexpected redemption or one that occurs separately from any action by the fund manager. Changes in fund characteristics that are a result of active fund management decisions are much more likely to lead to rating changes than are those that result from passive decisions.

Situations that significantly increase a fund's NAV volatility or ability to maintain a stable NAV tend to have a greater negative impact on highly rated funds. Likewise, fund management actions that increase a fund's risk profile or cause the rated fund to fall outside our PSFR criteria for a 'AAAm' rating will generally have a greater negative impact on a PSFR.

• A highly rated fund makes an investment in an issuer/fund/etc. that Standard & Poor's does not rate or that is not eligible under PSFR criteria;
• A 'AAAm' rated fund exceeds the 25% diversification criteria for an overnight repurchase agreement investment with a counterparty rated 'A-1';
• A 'AAAm' rated fund exceeds the diversification criteria for exposure to any one U.S. government agency;
• A 'AAAm' rated fund exceeds the diversification criteria for an investment in another 'AAAm' rated fund;
• A highly rated money-market fund invests in floating-rate securities that reset off of an index with less than 95% correlation to fed funds;
• A highly rated fund has more than 10% exposure to the limited liquidity/illiquid basket;
• A rated fund invests in a floating-rate security that exceeds the final maturity limits (i.e., two-year legal final maturity floating-rate sovereign securities in 'AAAm' rated funds);
• A fund's securities lending or reverse repo transactions fall outside published criteria.

When we become aware of deviations from expected risk tolerances that are inconsistent with quantitative criteria for a fund rating, we contact fund management to understand the reasons for the deviation and the plan to remedy the situation. We evaluate fund management's plan of interim and permanent corrective actions and the expected implementation horizon to restore and maintain its risk profile. We evaluate the severity of the deviation, pattern of historical deviations, responsiveness of management, and the fund's ability to maintain a stable NAV. In most cases, these instances historically have been "one-off" events that, in our view, have not materially affected the fund's ability to maintain principal value and therefore did not warrant rating action. If a fund or fund manager consistently operates outside of the criteria for a particular rating category, then we are more likely to take negative rating action. In rare circumstances, we may downgrade a fund due to lack of confidence in fund management's ability to stay within stated risk tolerances.

PSFRs are based on our independent assessment of a fund's ability to maintain principal value and limit exposure to loss due to credit, market, and/or liquidity risks. Our assessment does not rely on a fund sponsor's willingness and/or ability to support a rated fund's NAV. However, we will review and assess the measures a sponsor chooses to take to support its NAV during times of market stress or when a fund sponsor decides to take action to support the fund's NAV or liquidity. If we believe the measures would effectively support the NAV, we are not likely to take a rating action if we have confidence in both the timing and commitment of the measures. Historically, the types of support have generally included of one or more of the following: credit support agreements; letters of credit; purchasing distressed assets out of the fund at amortized cost; making cash investments in the fund; and/or creating an escrow/reserve account for the fund with highly rated entities in the name of the fund.

For example, when a rated fund's marked-to-market NAV drops below $0.9985 per share, we request more frequent reporting and discuss with fund management and/or the fund board cause(s) of the decline and activities occurring. If the marked-to-market NAV for a 'AAAm' rated fund drops below $0.9980, we may put the fund on CreditWatch with negative implications for the time the NAV remains below $0.9980, and may adjust the rating to 'AAm' if the NAV drops below $0.9975. If at any point during this time fund management outlines to us specific actions it plans to take to support the fund's NAV, we will consider the plan to determine if it will adequately sustain the fund's NAV above the specific fund ratings levels (i.e., 'AAAm' > $0.9975, 'AAm' > $0.9970, etc.).

We will not assign an investment-grade PSFR if fund management does not have written NAV deviation policies for each fund that would initiate action well before the fund is at risk of its NAV dropping below $0.995 (a 0.50% deviation; also know as "breaking the buck"). These policies typically include daily pricing, board notification, and board meeting requirements. When the marked-to-market NAV of a 'AAAm' rated fund drops below $0.9985 per share, we contact fund management to determine reasons for the decline, results of meetings occurring at fund management and/or board level, and request daily reporting on the fund's pricing/marked-to-market NAVs and cash flows. If the marked-to-market NAV drops below $0.9980 per share, a committee considers CreditWatch with negative implications based on the circumstances for the time the NAV remains below $0.9980. We may change the rating to 'AAm' or lower if the NAV drops below $0.9975. Management being proactive in minimizing the decline of a NAV would reduce the likelihood of a negative rating action.

Although an upward deviation is a better situation to deal with than a downward deviation, it too can cause challenges for fund management. Because money-market funds redeem shares rounded to the nearest penny, when a NAV per share rises to $1.005, redemptions are paid out at $1.01. Similarly, on the downside, when a NAV drops to $0.995, shares are redeemed at $0.99. So if an NAV is at or above $1.005, every redeeming share is paid an extra $0.005, thereby diluting the value of the shares of the remaining fund investors.

When the marked-to-market NAV of a 'AAAm' rated fund rises above $1.0015 per share, we contact management to discuss cause(s) of the increase and plans for dealing with the situation. As with a downward NAV movement, we discuss results of meetings occurring at fund management and/or board level, and request daily reporting on the fund's pricing/marked-to-market NAVs and cash flows. Most funds have adopted policies to realize the investment gains on the securities in the fund that are contributing the most to the NAV appreciation and they likely would make a one-time distribution to all shareholders so that the stability of the $1.00 NAV can be preserved and all shareholders are treated equally. Situations in which management is not proactive in managing an increasing NAV are more likely to result in a CreditWatch or negative rating action.

We first determine the impact a downgraded holding will have on a PSFR. This depends on, but is not limited to, the following:

• The amount and percentage of exposure;
• Remaining days to maturity;
• If the issuer is on CreditWatch Negative or is assigned a negative outlook;
• Our long-term rating on the issuer;
• The fund's asset flows (i.e., redemptions or shareholder volatility); and
• Current market price and liquidity.

When a downgrade occurs, we seek to understand fund management's independent view of the credit, liquidity, and market risk the downgraded issuer or issue presents to the fund. We evaluate its plan of action (hold, sell, reduce exposure) to determine whether, in our view, the plan presents the fund with a risk profile that is generally consistent with 'AAAm' ratings.

For example, if a 'AAAm' rated fund holds a security that is downgraded to 'A-2' from 'A-1', it is less likely to have a fund ratings impact if the downgraded issuer:

• is not on CreditWatch with negative implications;
• has a long term rating of 'A-';
• comprises a small percentage of the fund (less than or equal to 1%); and
• has a short remaining time to maturity (less than or equal to 30 days).

Conversely, if a 'AAAm' rated fund holds a security that is downgraded to 'A-2' from 'A-1', it is more likely to have a fund ratings impact if the downgraded issuer:

• is on CreditWatch with negative implications;
• has a long-term rating of 'BBB';
• comprises a larger percentage of the fund (more than 3%); and
• has a longer remaining time to maturity (more than 90 days).

The following table provides examples of favorable versus unfavorable characteristics of 'A-2' rated issuers in highly rated funds.

Analytical Considerations For 'A-2' Rated Investments In PSFRs
	Most Favorable	Favorable	Unfavorable	Most Unfavorable
Long-term rating	A	A-	BBB+	BBB
CreditWatch Negative	No	No	Yes	Yes
Percentage (%)	= 0.5%	>0.5% = 1%	>1% = 3%	> 3%
Maturity	= 7 days	= 30 days	> 30 days	> 90 days

A PSFR with exposures to 'A-2' rated issuers that have characteristics that are "most unfavorable" is more likely to experience a negative rating action than a PSFR that has 'A-2' rated issuers with "most favorable" characteristics.

The quantitative criteria maximum WAM in 'AAAm' PSFRs is 60 days. If a rated fund exceeds the 60-day WAM criteria, we investigate the cause (that is, was it active or passive) and when management expects the WAM to be back in line with criteria. For instance, if management indicates it had a large unexpected redemption, we will seek to understand if management is taking steps to improve its lines of communication with shareholders or taking other actions to minimize the chances of this occurring again. We also consider whether management performs scenario analysis to estimate the effect of cash-flow volatility on the fund's WAM. We are more likely to take rating action on a fund that exceeds WAM criteria based on persistent, active investments by fund management that cause the fund to continually operate outside the WAM criteria. If a fund frequently operates outside the WAM criteria for its rating category due to outside factors (frequent large shareholder outflows), we may establish a lower maximum WAM (i.e., 50 days for a 'AAAm' rated fund). Alternatively, we are less likely to take rating action if increased WAM is an anomaly for fund management and it has taken active steps to address the cause of the situation.

On occasion, a fund manager may attempt to minimize the impact a downgraded or defaulted security has on a rated fund by removing the distressed asset from the rated portfolio and placing those assets into an unrated separate account. This process, commonly called bifurcation, aims to protect the preexisting portfolio from any losses incurred by the distressed asset. Each situation involving a bifurcated portfolio is distinct. We review fund bifurcation on a case-by-case basis, typically by evaluating the following aspects:

• The fund composition at the time distressed assets were removed from the fund;
• Legal and structural distinctions between the fund and the account or fund that holds bifurcated assets;
• Shareholder losses (if any) based on the market value of bifurcated or distressed assets;
• Redemption restrictions on the fund that are predicated on the bifurcated assets; and
• Changes in the fund's policy and investment guidelines.

After reviewing the details of the bifurcation, we will analyze how these factors affect the rating assigned to the fund. For example, if we believe a principal stability rated fund would pay less than a $1.00 per share NAV if the bifurcation were not executed, we would view it as commensurate with a distressed exchange and lower the issue rating to 'Dm' before raising it to a level that reflects the then-current ability to maintain principal value. This approach is consistent with our methodology regarding distressed exchanges outlined in "Rating Implications Of Exchange Offers And Similar Restructurings," published Jan. 28, 2009, on RatingsDirect.